Municipal Bonds Get Crushed

Couple the increased likelihood of an extension of the Bush tax cuts with a new Congress that has at the least put on a front of opposing further bailouts, and you get the kind of municipal bond performance we've seen in recent days.  After drifting lower from late August to early November, the National Municipal Bond ETF (MUB) has tanked this week.  The California Municipal Bond ETF (CMF) has tanked as well.   So far the investment world hasn't paid much attention to this big move lower in the muni-bond market, but it's likely to get coverage soon if the declines continue.

Comments

[SK]

Interesting, but most of this is likely just duration. Muni bonds are generally prety long and TLT will show a similar move over this time frame. The real story is how much the long end of the curve is selling off...

[Dog Face]

At least part of this move has to do with a program called Build America Bonds. BABs are an alternative for state and local governments that allow them to sell taxable--as opposed to tax-exempt--bonds and get a cash subsidy from the feds for 35% of their interest costs. The program is due to expire at the end of December. A lot of governments have used BABs instead of tax-exempts, especially at the long end of the yield curve, which has kept new supply--and yields--of tax-exempt bonds at the long end artificially low. The long end of the muni market is now correcting itself based on the assumption that the supply of long-dated tax-exempt bonds will pick up beginning in January.