The largest exchange-traded fund tracking the $3.7 trillion municipal-bond market is poised to sell for less than the value of its holdings for a record stretch as demand for local debt sinks to the lowest level in more than two years.
The $3.2 billion iShares S&P National AMT-Free Municipal Bond Fund, known as MUB, traded at a discount to its net asset value for 60 straight days through Aug. 20, data compiled by Bloomberg show. The last 60-day period followed banking analyst Meredith Whitney’s incorrect projection in December 2010 of “hundreds of billions of dollars” of local-government defaults within a year.
MUB, created in September 2007, traded at 98.9 percent of its net asset value in New York on Aug. 20, according to Bloomberg data. The current discount may persist for the next few weeks, reflecting concern that interest rates will rise further if the Federal Reserve cuts its bond purchases, said Bart Mosley, co-president of Trident Municipal Research in New York.
Yields on benchmark munis have soared to their highest levels in more than two years as investors wait for the next Federal Open Market Committee meeting beginning Sept. 17. Fear of more increases is “front and center as a worry,” Mosley said.
“Until we get some clarity on that, people are going to be nervous about recommitting assets to fixed income,” he said.
Fund Withdrawals
Investors have pulled $13.8 billion from U.S. muni mutual funds in the eight weeks through Aug. 14, the most since February 2011, Lipper US Fund Flows data show. The withdrawals have been reflected in trading of shares of MUB. The fund’s price dropped to $101.87 in New York Aug. 21, near the lowest since April 2011, according to Bloomberg data.
It has lost $41 million of cash this year through Aug. 19, fueled by $252 million of outflows in the past two-and-a-half months, Melissa Garville, a spokeswoman for BlackRock, said in an e-mail. That exceeds the $240 million of withdrawals from MUB in the three months through January 2011.
While ETFs are similar to mutual funds that track an index of equities, bonds or commodities, they are bought and sold on stock exchanges and their prices may rise or fall more than the value of the assets they hold.
Two-Year High