The biggest exchange-traded fund tracking the $3.7 trillion municipal-bond market sold this week at the highest premium to the value of its assets since May, an early sign that local debt may avoid a second year of losses.
After the worst year since 2008 for city and state debt, the shift to a premium for muni ETFs points to a potential return to earnings, said Mikhail Foux, a credit analyst at Citigroup Inc. in New York. Local securities may earn 4% to 6% in 2014, he said.
The $3.1 billion iShares National AMT-Free Muni Bond ETF, known as MUB, sold at 0.28% more than the worth of its holdings on Jan. 10, the highest since May, data compiled by Bloomberg show. The premium was 0.1% yesterday. The fund is mirroring the broader tax-exempt market as investors are pushing yields down from a three-month high set in December, said Bart Mosley, co-president of Trident Municipal Research in New York.
“Historically, it’s a precursor of abating outflows and stronger performance of munis,” Foux said of the swing to a premium. “We continue to be somewhat bullish on munis.”
Citigroup’s forecast underscores Wall Street banks’ varying outlooks for 2014 in the market, which states and municipalities nationwide use to pay for schools, bridges and roads.
Morgan Stanley’s main forecast for this year calls for returns ranging from a loss of as much as 3.8% to a 0.2% gain as an improving economy leads the Federal Reserve to trim its bond-buying program, pushing up interest rates, the bank said in a Jan. 7 report.
Tax-exempt securities lost 2.9% last year, Bank of America Merrill Lynch data show. The last time munis posted two straight annual losses was 1980-1981, according to Barclays Plc data.
The MUB ETF traded at about $105.50 per share in New York, the highest since July, Bloomberg data show. Before last week, the fund had sold either at a discount or at the value of its holdings on all but two days since May, amid losses across fixed-income assets.Created in 2007, MUB is an exchange-traded fund. ETFs are similar to mutual funds that track indexes of equities, bonds or commodities. Yet they can be bought and sold during the trading day and their prices may rise or fall more than the value of the assets they hold.
Demand has revived as munis are rallying this month and as a months-long cash exodus from muni mutual funds is slowing. Benchmark 10-year munis yield 2.73%, down from as high as 3.05% last month, Bloomberg data show. The rate reached 1.52% in December 2012, the lowest since at least January 2009.