Allan Roth
5 min read
In This Article:
Nearing the mid-point of the year, it’s been a relatively good period for most investment grade bonds. Not so much for municipal bonds.
The iShares Core US Aggregate Bond ETF (AGG) gained 2.85% while the iShares National Muni Bond ETF (MUB) lost 1.29% through June 17. That’s a differential of 4.14 percentage points. Both numbers include dividends paid. But the biggest difference between the two funds is that the municipal bond fund is federally tax-exempt as the bonds are issued by states and municipalities, while the US Core Aggregate bond fund is taxable (though part is state tax-exempt for most states). Yet they are quite similar in other ways. Both are high quality, moderate duration, and low-cost bond funds with Morningstar showing the following as of June 11, 2025:
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AGG has an average credit rating of AA-, while MUB is rated at AA.
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AGG’s effective duration is 5.81, while MUB’s is 6.76.
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AGG’s annual expense ratio is 0.03%, while MUB’s is 0.05%.
Though AGG has a slightly lower credit rating, investors often run to US government bonds in uncertain times, and the majority of AGG are US government or government agency bonds. If that’s the differentiator, one would have also expected corporate investment grade bonds to have done poorly. But the iShares Broad USD Investment Grade Corporate Bond ETF (USIG) actually gained 2.95%. Even junk (below BBB) has done well. So it would appear the market is punishing only the muni market, which comprises about 9% of the $47 trillion dollar US bond market, according to the SIFMA. So, what’s going on?
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First, let’s check in on liquidity. The self-regulatory body Municipal Securities Rule Making Board (MSRB) reports that “purchasers of municipal securities tend to be ‘buy-and-hold’ investors and the vast majority of fixed-rate municipal bonds and notes are not traded on a regular basis after the trading that occurs when they are new issues.” Thus, unlike with Treasurys and investment grade corporate, bid-ask spreads for munis tend to be large. They can easily be more than 100 basis points and, in an extreme example many years ago, one client paid a 10.25% spread (or 1,025 basis points).
Year to date, MUB has seen a net outflow of $1.22 billion or a bit over 3% of its assets. Whenever funds have to sell the underlying bonds to meet redemptions, bid-ask spreads are being paid. Sales in a relatively illiquid market cause prices to decline.
