Municipal Bond ETFs Rebuff Weak Oil Prices

Oil prices are on the mend this year, but the United States Oil Fund USO would need to more than triple to sniff its 2014 highs. USO, which tracks front-month West Texas Intermediate futures, would need to nearly quadruple to come within striking distance of its 2012 highs.

Heading into 2016, there was some concern from bond market observers about the impact of lower oil prices on municipal bonds. However, exchange traded funds holding municipal bonds have rebuffed those concerns. In fact, investors have been revisiting municipal bond ETFs, such as the Market Vectors High-Yield Municipal Index ETF HYD and the iShares National AMT-Free Muni Bond ETF MUB in significant fashion.

Underscoring the notion that investors are not overly concerned about oil's impact on the muni market and focusing more on the Federal Reserve's reluctance to raise interest rates, two of the six ETFs that hit 52-week highs yesterday were muni ETFs, including HYD. Of the other four ETFs in the 52-week high club, one was an ETF of ETFs that features a hefty weight to a muni bond fund. 

“The municipal bond market has been buffeted by pension shortfalls, Puerto Rico, Chicago, Detroit and other news worthy events.  Oil, however, is not yet one of the major forces impacting the municipal bond market.  In February 2016 oil dependent states and their municipal bonds were showing signs of weakening as the price of oil continued its plummet,” said S&P Dow Jones Indices Global Head of Fixed Income J.R. Rieger in a note out Monday. 

A benefit of municipal bond ETFs when it comes to the oil price scenario is that, outside of Texas, most of these ETFs, do not feature large allocations to major oil-producing states. For example, Texas munis are 7.6 percent of HYD's weight, but that is just the ETF's fourth-largest state allocation. Louisiana is 2.5 percent of HYD's weight and the ETF features no significant exposure to Alaska and North Dakota muni bonds.

“Now, nearly three months later those bonds with the exception of North Dakota have shown resilience and have performed similarly to the overall municipal bond market,” adds Rieger.