Muni Bond Funds Moment in the Limelight

By Tom Lydon, ETF Trends

After the Detroit’s bankruptcy hindered demand, municipal bonds, along with related muni bond funds, are posting robust gains on huge inflows.

According to Lipper data, muni funds have gathered $3.1 billion in assets this year, a stark shift after the $39.9 billion pulled from muni funds over the last 31 weeks of 2013, reports Aaron Kuriloff for the Wall Street Journal.

Meanwhile, yields on muni debt dipped to 2.325% Wednesday, its lowest in almost a year.

Municipal bonds have been one of the best performing assets this year. Munis returned 5.869% in 2014, including interest payments and price appreciation, compared to the 5.769% return on investment-grade corporate debt, 3.3% for the S&P 500 and 2.982% on Treasuries.

High-yield municipal bonds have jumped 9.332% year-to-date, according to Barclays data.

The rising federal tax rates are making tax-exempt municipal bonds more attractive for investors.

“I don’t think the need for tax-exempt income ever went away, and there appears to be pent-up demand,” John Miller, co-head of fixed income at Nuveen Asset Management LLC,said in the article.

Some predict that munis have further room to gain as new muni issuance fall short of rising demand. Vikram Rai, a fixed-income strategist at Citigroup Inc., estimates that issuance will fall to $280 billion this year, from $334 billion in 2013.

“The primary market supply is very anemic and that’s really driving down yields (and driving up prices),” Rai said in the article.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.58% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 30 May 2014).

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