Late last year I mentioned the relative thrashing muni bonds had experienced. Fast forward to today and the mass defaults as predicted by Meredith Whitney are not occurring and muni bonds have experienced a nice rebound. Let's look at some charts:
The ETF's MUB and IEF are great for comparing the two sectors as they have almost the same duration of 7.43 vs. 7.24. While they are not precisely the same (MUB's bonds are more smeared out along the maturity curve while IEF's are very compact) it is good enough for this discussion.
[The math: 80% of IEF's ytm = 2.29%
MUB yield change (3.30 - 2.29) * duration of 7.43 = 7.50 ]
Reminder: I don't manage your money and this is not a complete part of my investment portfolio. I may not tell you when I close out the position. This should not be construed as investment advice as I do not know your tolerance for risk, tax situation, need for income, etc.
Disclosure: Long MUB in both personal and client accounts.
Ishares MUB etf detail
Ishares IEF etf detail
Note: Another possible reason why MUB is outperforming is the light issuance schedule for muni bonds right now. This may be due to the previous rush to market while Build America Bonds were still possible before the 12/31/10 deadline or the current high relative yield environment for muni bonds.
Bond Buyer article #1 & Article #2 (ht MuniLass)