Lately we’ve been watching municipal (muni) bond exchange traded funds (ETFs) fall at a rate that hasn’t happened since the Great Credit Crisis of 2008. Most of the available research is painting a picture of an almost perfect storm hitting the municipal market at the present time. Municipalities currently face: tough budgetary constraints due to revenue shortfalls, severely underfunded public pension funds, the possibility of an extension of the Bush tax cuts, a recent surge in new issuance, doubts about the future of the Build America Bond program, and a large municipal bond insurer filing for chapter 11 bankruptcy protection. In addition, some think this is a reaction to the Fed not buying a larger percentage of long-term bonds in its recently announced QE2 program. Whew, that’s a nasty witch’s brew for munis, which is reflected in the chart below.
With various muni ETFs down a quick 5-7% since the beginning of November, we are currently internally debating whether the decline is just a short-term dislocation that presents a buying opportunity, or a warning signal for the health of the overall market. At the moment, we are furiously digging through the research to make sure we have an informed opinion regarding this situation. My gut feeling is that this is an overshoot that will likely present a short-term window for investors to capitalize on. But many years in this business has taught me that investors ignore credit markets at their own peril, and so it’s worth double and triple checking before acting. Municipal bonds are typically thought of as boring investment vehicles for conservative investors. However, right now things are pretty exciting in the muni markets.
Chart: iShares Municipal Bond ETF (MUB)
