Greenberg: Mining the Muni Bond Mess
Muni bond, municipal bonds, funds of all types have been taking a drubbing, and the weakness continues.
Muni bond funds still control most muni bond investments, with about a half-trillion dollars in assets compared with a mere $8 billion for muni ETFs (exchange-traded funds).
But much of the attention during the recent swoon is on muni ETFs, not because they're better or worse than regular muni bond funds, or the individual bonds themselves, but because they're simply easier to track on a tick-by-tick basis.
The biggest of all muni-bond ETFs is the I-Shares S&P National Muni Bond Fund , better known by its stock symbol, MUB. It comprises nearly 30 percent of all muni bond ETF assets.
After peaking in August at around $107, it’s now trading at around $100. Most of the decline has occurred over the past week, and while on a percentage basis that slide may appear small, it’s a big drop for a bond fund—especially one that yields 3.54 percent.
Among reasons for the decline:
- Concerns over credit quality—something we'll talk about in a second
- The huge wave of supply
This week alone some in the muni bond industry are expecting as much as $20 billion in new issues, including this week’s $10 billion California muni bond offering (which reportedly isn’t going so well.) Usually, you might see $20 billion in issues a month. Some believe that by the end of next week, there could be a total of $40 billion.
Which gets us to credit quality. With that increased supply, comes concern over the fundamentals of the municipalities selling the bonds.
And not all funds or ETFs buy the highest quality bonds. According to Morningstar, the average credit rating of the MUB, for example, is a single-A.
That's because it's portfolio is based on a diversified portfolio, much of it long-term in duration.
Enter the dire need of many municipalities, struggling with budgets, to raises cash, especially if the federal government's Build America Bond program goes kaput at year's end.
What’s a muni investor to do?
Given the uncertainties, Morningstar ETF analyst Tim Strauts suggests funds with short durations. Among them, he cites the SPDR Lehman Short-term Muni Fund, better known as the SHM. He also mentioned any number of the I-Shares target maturity funds.
Going forward: The pros I talked with expect prices to continue sliding as the overall bond bubble, as has been called, continues to deflate. And it will continue to lose air, they say, until supply gets back to parity.
My take: Whether in ETFs or traditional funds, investors in any bond fund need to remember the relationship between interest rates and price. (Hint: They go in opposite directions.)
While pros may scoff at even bringing that up noting, remember, most investors in munis are individuals.
And in case you were wondering: Unlike most ETFs, investors in munis still don’t generally use muni ETFs as part of a hedging strategy by buying the bond and shorting the ETF. (That bit comes by way of James Colby, senior muni fixed-income strategist at Van Eck Global.)
Over and out.
Questions or comments? E-mail Herb On the Street at cnbc.com