Why Summer Heats Up Muni Bond ETFs

Why Summer Heats Up Muni Bond ETFs

So far this year, the municipal market has outperformed Treasuries and corporates.

Reviewed by: Patrick Luby
Edited by: Patrick Luby

Patrick Luby is the senior municipal strategist at CreditSights.

Year-to-date, the municipal market has outperformed the U.S. Treasury and corporate markets. While the municipal High Yield index is one of only two major subindices with positive year-to-date returns, the other major muni indices have performed well so far this month.

Further price support could come from potentially heavy reinvestment demand over the next three months.



As they do every year, the summer months will bring a spike in municipal bond redemptions, which this year could mean an imbalance between new issue supply and reinvestment demand of as much as $60 billion. We expect the amount of bonds to be redeemed in June, July and August to total over $136 billion.

Meanwhile, new issue volume—which is more than 20% behind last year’s pace—is averaging about $24 billion per month, so investors with bonds due for redemption may find themselves with limited reinvestment choices in the new-issue market. (Forecast redemptions include maturing bonds as well as bonds that have been refunded and that are expected to be called away.)

While the potentially heavy reinvestment demand could be strongly supportive of prices, the wild card is how much of that returned principal will be held on the sidelines.



Because of the enormous amounts of principal being returned to municipal bond investors over the next three months, we expect muni ETF trading activity will remain active.

Investors who wish to use muni ETFs as temporary placeholders to maintain their appropriate allocation may want to focus on the largest and most heavily traded funds.



Total assets in municipal bond ETFs are still a small fraction of the assets in mutual funds, but over the last several years, ETFs have attracted a disproportionately large share of the flows into funds.

The decline this year in the ETF share of flows is due to the unusually large spike in mutual fund inflows in January. 



Patrick Luby is the senior municipal strategist with CreditSights Inc. For more information or feedback, please call us at 212-340-3840 or email us at [email protected]. This article is not intended as an offer or solicitation with respect to the purchase or sale of any security or as personalized investment advice. No part of this report may be copied, disseminated, reproduced or distributed without CreditSights’ prior written consent. CreditSights Inc., a publisher of investment research, does not give personalized financial or investment advice, and therefore does not recommend the purchase or sale of financial products or securities. Recommendations made in a report may not be suitable for all investors. See Important Disclosures at https://creditsights.com/legal/terms.

Patrick Luby is the municipal strategist with CreditSights Wealth and has decades of experience in the municipal bond market.