The largest exchange-traded fund tracking municipal bonds traded at a discount to its underlying assets for the first time in five months, dragged down after the Federal Reserve’s improved economic assessment reduced the appeal of government debt.
The iShares S&P National AMT-Free Bond Fund traded 0.13 percent below its net asset value yesterday, according to data compiled by Bloomberg. The ETF, known as the MUB, fell 0.9 percent yesterday to $108.35, the lowest level since Dec. 30, before rising to $108.60 at 11:32 a.m. New York time today.
Strengthening labor markets spurred the Fed to boost its outlook for the economy on March 13, driving down U.S. Treasuries. Last week, municipal borrowers sold $10.4 billion of fixed-rate bonds, the most since November. The ETF (MUB) has retreated since it reached a three-year high versus its per-share net asset value on Feb. 13.
“A more bearish sentiment is growing,” Matt Fabian, an analyst at Concord, Massachusetts-based Municipal Market Advisors, said in a telephone interview today. “Munis had already weakened last week because of the incremental supply in the market that pushed prices lower,” he said. “Now you have the weakness in Treasuries. It’s reasonable prices would fall.”
Municipal debt declined last week, pushing yields up by 17 basis points for the biggest increase since October, according to data compiled by Bloomberg. Yields on 10-year Treasuries have risen to 2.27 percent from 2.03 percent on March 12, before the Fed’s statement on the economy.
Decline Since February
The iShares security fell 4.9 percent through yesterday since trading at a 3.96 percent premium to its underlying holdings on Feb. 13. MUB had surged after declining bond sales by states and local governments made the security one of the only ways to capture gains in the municipal market. Since MUB began trading in September 2007, it has traded at an average premium of 0.38 percent.
“The premium will probably expand a little today as people try to use MUB to increase exposure to munis at more favorable levels,” Bart Mosley, the New York-based co-president of Trident Municipal Research, said in an e-mail today.
The last time the ETF traded at a discount to NAV for more than a day was July 27 through Aug. 16, a period leading up to and following the U.S. government’s loss of its AAA credit rating at Standard & Poor’s.
ETFs usually track an index while trading on an exchange like stocks. Certain institutional investors are allowed to trade directly with a fund, creating or redeeming bundles of shares in exchange for baskets of a fund’s underlying securities. The mechanism helps an ETF’s share price stay close to its per-share net-asset value as investors arbitrage discrepancies between the fund shares and underlying holdings.
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