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Muni-Bond ETF Volatility Could Return

(Story updated with additional context on "QE2" effect and closing prices.)

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(Story updated with S&P commentary)

NEW YORK ( TheStreet) -- Although municipal bond ETFs have stabilized recently, analysts believe the volatility -- spurred by debt crises in the states and a bearish outlook by a noted analyst -- could return.

Over the last few weeks, the municipal bond exchange-traded funds had exhibited a bout of volatility triggered by Fed fiscal policy decisions and grim comments from a leading industry analyst.

On Tuesday, the iShares S&P National AMT-Free Municipal Bond Fund (MUB) ended Tuesday's regular trading session down 0.1% to $98.72, and the SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI) finished flat at $21.43. The iShares fund has tumbled about 4.1% over the past year and about 6.7% over the past three months against a rally in the broader equities market.

Municipal bond funds had outflows of about $2.37 billion during the week ended Jan. 12, according to the Investment Company Institute.

"The whole fixed-income market has been more volatile since the Federal Reserve announced its second round of quantitative easing," Morningstar analyst Tim Strauts said.

Although the Fed's objective was to keep interest rates low and boost investor confidence through a second round of quantitative easing, or QE2, uncertainty surrounding the benefits of the measure led to a rise in yields and decline in prices across the entire fixed income space, including Treasuries. The changes were even more pronounced in municipal bonds, given a combination of factors including their tendency to move in tandem with Treasuries and their low levels of liquidity.

The volatility got an extra boost as Meredith Whitney, the U.S. financial analyst who achieved fame through her accurate prediction of the global credit crisis, said on CBS' 60 Minutes program a few weeks ago that more than 100 American cities could go bankrupt in 2011 as the total debt load of cities and states across the country adds up to about $2 trillion.

More than 100 municipal bond defaults could occur, she predicted.

Still, Strauts said serious losses on municipal bonds in the ETF space don't require cataclysmic pronouncements from an analyst like Whitney.

"The typical municipal bond investor is an individual investor," and can be significantly influenced by headlines in general, he said.
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