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Muni-Bond ETF Volatility Could Return

"We saw larger discounts a few weeks ago as the market price got as much as 3% away from underlying net asset value calculation," he said.

"Someone's going to default, and there's going to be article about it; and that's only going to increase the volatility of the ETFs."

Standard & Poor's credit analyst Gabriel Petek noted in a report the potential for greater volatility in municipal bond prices in 2011. "We believe that notable rating downgrades, specific instances of severe fiscal problems and a generally softer environment for municipal credit could occur."

However, the analyst expects that the majority of state and local government bond issuers rated by S&P will maintain medium to high investment grade ratings. In the report, the analyst noted that the S&P/Investortools Municipal Bond Index, which includes $1.27 trillion of municipal debt outstanding, saw newly defaulted bonds of $2.65 billion, or 0.21% of the index in 2010.

"This is actually somewhat of a decline compared with 2009," where there was $2.9 billion of new defaults."

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-- Written by Andrea Tse in New York.



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Copyright 2010 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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