Q Here's what I don't get: I've been watching two Minnesota municipal bond funds, MXA and MYI, for several years and the yield was decent. In the past year or so, the market price has been on a decline, which boosted the yield to the 7 to 9 percent range respectively on a tax-free basis. Yet shares continue to be sold and the price continues to slide. What aren't I seeing, or what don't I know about these exchange-traded funds (ETFs)?
PATRICK
A Here's what I see happening in the municipal bond market. Last year was terrible. Among the factors that drove muni bond prices down and muni bond yields up: investors fleeing the tax-exempt market -- and just about every other market -- for the safety of U.S. Treasury securities, FDIC-insured certificates of deposit and the like; hedge funds and other professional money managers raising cash by dumping munis; the end of the muni-bond insurance market, and deteriorating state and local government finances.
The muni market is now doing better than in 2008, at least so far this month. For instance, the funds you mentioned -- MXA and MYL -- sport a total return of 12.53 percent and 19.96 percent year-to-date, according to data compiled by Bloomberg. That compares with a total negative return for MXA of 13.89 percent and 24.27 percent for MYI in 2008.
The lure of high yields is starting to attract more investors, especially individual investors. Uncle Sam doesn't impose a levy on muni-bond interest payments. That's why tax-exempt securities typically yield between 75 percent and 90 percent of their taxable Treasury equivalents. Yet munis now yield more.
There's got to be a catch, right? Many investors are fearful that the worst financial crisis since the Great Depression will lead to widespread municipal bond defaults. With the recession getting worse, credit risk remains an anathema to investors. Why take any risk with money, many wonder? The once-staid muni bond market is now perceived as high-risk. You're seeing a tug-of-war between the attraction of high yields and the risk of credit downgrades.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.
