National muni ETFs lost 0.86% last week against 0.29% for similar-duration Treasuries
The iShares National Muni Bond ETF lost 0.86% in the week through Friday, September 4, while the iShares 7-10 Year Treasury Bond ETF lost 0.29%, as the 10-year yield rose 5 basis points to 4.78%.
Wednesday and Thursday opened the gap. The iShares 7-10 Year Treasury Bond ETF IEF rose 0.09% and then 0.11%. The iShares National Muni Bond ETF MUB fell 0.11% and then 0.21%.
By Friday the muni fund had lost 0.86% for the week, total return, more than its 0.78% decline for 2026 as a whole.
MUB's effective duration was 7.1 years as of Wednesday. IEF's was 7.0 years. A 7-year muni book should not have lost 0.86% when a Treasury book of the same duration lost 0.29% if the only moving part is the Treasury curve. Vanguard's tax-exempt bond fund VTEB lost 0.77%, so the gap was not an iShares quirk.
The 10-year's 5-basis-point week
From Friday, August 28 to Friday, September 4, the Treasury par curve did not lurch. The 10-year rose 5 basis points from 4.73% to 4.78%. The 30-year rose 2 basis points from 5.22% to 5.24%. Friday's 30-year close was a basis point below Thursday. The two-year finished at 4.37%, the five-year at 4.54%. The 2-year/10-year spread ended at 41 basis points, 3-month/10-year at 87.
Inside those net changes sat a path duration holders actually had to live through. The 10-year reached 4.79% on Tuesday and Wednesday, then faded to 4.77% on Thursday. Fed Governor Christopher Waller said that day he could support holding rates if August inflation data showed progress. Friday's payrolls took 1 basis point of that fade back.
August payrolls rose 162,000, above the 31,000 average of the prior 12 months. Unemployment was unchanged at 4.1%. Average hourly earnings rose 0.3% to $37.75, up 3.1% from a year earlier. June and July payrolls were revised up by a combined 55,000.
A 20-plus-year Treasury fund can lose money on a week when the 30-year's Friday-to-Friday change is 2 basis points, because Monday and Tuesday already did the damage. The iShares 20+ Year Treasury Bond ETF TLT fell 0.79% on Tuesday alone. It then rose 0.17% on Friday, the jobs day. Over the past month, TLT is unchanged.
Duration paid only in T-bills
A 2-basis-point rise at 30 years is a rounding error at three months and a price hit at 20-plus years. Income filled in some of the hole in long bonds: TLT's price fell 0.81%, about twice the 0.42% total-return loss.
One sleeve beat T-bills. The iShares 0-5 Year TIPS Bond ETF STIP returned 0.17%.
Vanguard's total U.S. investment-grade bond fund BND and the iShares fund that tracks the Bloomberg U.S. Aggregate Bond Index, AGG, both lost 0.15%. The week did not care which wrapper you used.
Total return, Friday, August 28 close through Friday, September 4 close.
Credit followed rates. Munis did not recoup
Investment-grade credit did not cushion the Treasury backup. LQD, effective duration 7.7 years as of Wednesday, lost 0.41%. High yield's book is much shorter. HYG had an effective duration of 3.0 years as of Thursday and lost 0.19%. The iShares 0-5 Year High Yield Corporate Bond ETF SHYG lost 0.10%. Shorter duration inside junk lost less.
HYG went ex-dividend Tuesday at $0.435 a share, payable Friday. Its price fell 0.73% on the week; the total-return loss was 0.19%. Ranking an income fund by the unadjusted close would have overstated the damage.
Floating-rate notes, in FLOT, returned 0.04%. Coupons that reset with short rates do not need the 10-year to cooperate. Emerging-market dollar bonds in EMB were roughly unchanged, down 0.01%.
On Tuesday, the muni selloff looked like the Treasury selloff. Jeff Timlin, a municipal portfolio manager, told The Bond Buyer that day that the move was primarily a function of Treasury yields and that munis were not showing more volatility than Treasuries. Wednesday and Thursday did not match that description. IEF recovered. MUB kept falling.
The extra loss is not a spread blowout. MUB's option-adjusted spread was 28.8 basis points on Friday, August 28, and 28.4 basis points on Wednesday, slightly tighter versus Treasuries. It is not a fee. Vanguard's fund, at 0.03% a year against iShares' 0.05%, produced the same kind of week. Munis sold with Treasuries on Tuesday and then failed to recoup.
The bounce munis missed is still sitting in the funds
A holder who treated a tax-exempt book as the quieter version of IEF got the wrong answer this week.
August consumer-price data is the print Waller said would decide whether he supports holding the 3.50% to 3.75% funds range at the Federal Reserve's September 15-16 meeting. Front-end funds will feel that decision first. Long bonds will feel it only if the 10-year and 30-year go with it, which, this Friday, they mostly did not. Whether munis recoup is a separate question from whether the 10-year does.
Frequently asked
How big was the move in Treasury yields?
The 10-year rose 5 basis points to 4.78% and the 30-year rose 2 basis points, so the curve barely moved on the week.
Was the muni loss specific to the iShares fund?
No — Vanguard's tax-exempt bond fund lost 0.77%, so it wasn't an iShares quirk.
Did credit cushion the Treasury backup?
No — investment-grade corporates lost more than 7-10 year Treasuries, while shorter-duration high yield lost less.
What happens next for rates?
August consumer-price data is the print Fed Governor Christopher Waller said would decide whether he supports holding the 3.50% to 3.75% funds range at the September meeting.