We've expected credit spreads to deteriorate for quite some time. In our view, new economic data, a technical lag in spread activity, and the Iran war might consolidate the argument. While re-inflation risk has to be acknowledged, we think investors will stay in and migrate to higher-quality bonds from riskier assets. The iShares National Muni Bond ETF is a prime candidate, showing less spread risk than investment grade bonds and lower volatility than intermediate-term treasury ETF, IEF.
Maintaining a neutral stance on iShares National Muni Bond ETF due to opposing forces: Structural funding concerns versus diminished inflation worries. MUB's seven-year duration makes it sensitive to yield changes, but credit risk remains minimal as most holdings are AA-rated, and credit spreads have been under control. Inflation risks are subdued thanks to lower oil prices and modest U.S. import exposure, easing one major headwind for fixed income.
The Republican-controlled U.S. House passed President Trump's tax and spending bill by a razor-thin margin of 215-214 votes, adding $3.8 trillion to the national debt. The bill is now headed for the Senate approval.
The iShares National Muni Bond ETF is risky due to already anticipated inflation and supply chain shocks under the Trump administration. MUB's high duration at over 6 years positions it badly for that. Inflation expectations have risen, complicating the Fed's inflation battle and potentially leading to higher local production costs and consumer prices.
The Internal Revenue Service has announced new tax brackets for 2025. This makes now an ideal time to revisit the benefits of muni bond ETFs.
The iShares National Muni Bond ETF is poised for strong performance due to its high duration and expected rate cuts by the Fed. Municipal bond issuances are likely to increase, but the overall duration effect from falling rates will be favorable for MUB. MUB has minimal credit risk, with most issuers rated around AA, and offers a low expense ratio of 0.05%.
iShares National Muni Bond ETF offers tax-free municipal bond exposure with $37.6 billion in assets under management and a low expense ratio of 0.05%. The ETF has a 30-day SEC yield of 3.49% and potential for capital gains, despite lower one-year and five-year performance numbers. Reasons to consider buying MUB include potential tax increases, expiration of Trump tax cuts, late economic cycle, and Federal Reserve projections.
States can't rely on affordability alone to help drive an influx of newcomers from higher-cost states to boost their tax revenues and overall finances.