Thursday, November 18, 2010

Some perspective on the muni bond market

There's been some recent news regarding how municipal bond prices are dropping and California is having some problems selling new muni debt.  Looking back one can see the relative drop in municipal bond prices is not new and its been going on since May.

Observing the ratio of the etf's MUB (nationwide muni bond fund) to IEF (7-10 year US Treasury bond fund) can be instructive as it shows the relative value of two bond funds with almost the same duration (7.58 vs 7.26)

The relative decline in MUB is more dramatic when observed in this fashion versus an absolute basis. Furthermore looking at each etf's yield is interesting:
MUB 12 month yield: 3.71%
IEF 12 month yield: 3.00%
In other words a tax free bond fund is yielding 71 basis points more than a treasury fund with the same interest rate risk.  This 'shouldn't be' as muni bonds are tax free and a safe investment, right?  The markets are telling you something here; the perceived credit risk of muni bonds is increasing.

Stockcharts MUB:IEF
etf MUB home page
etf IEF home page

edit:  I have a followup post to this entry which you should read as well.

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