Industrial development revenue bonds have shown the best total return of all municipal bond sectors so far this year.

According to data from Bank of America Merrill Lynch Global Research the bonds returned 12.2% from Jan. 1 until Tuesday.

Health care and hospital muni bonds have been the second and third ranked producers of total return this year, both yielding about 9.9%.

These sectors generally have lower-rated credits, said BMO Capital Markets managing director Justin Hoogendorn. Investors have been willing to take on more risk as the year has progressed, he said. While less the case in the second quarter, overall it has been a “risk-on” year.

“In general these are high-yield sectors that have benefitted from spread-tightening,” said Matt Fabian, managing director at Municipal Market Advisors. There’s been no particular good credit news about these sectors that have attracted investors. Instead, the sectors “are riding the overall trend,” he said.

With the impending “fiscal cliff” and sequestration at the federal government level, the health care industry actually looks riskier in the next several months, according to Fabian.

Earlier in the year investors were concerned about whether the U.S. Supreme Court would uphold the Affordable Care Act, said John Hallacy, head of municipal research at B of A Merrill. That kept prices in the health and hospitals sector low. Meanwhile, many hospitals were preparing for the introduction of the health care law. After the court upheld the act on June 28, the hospitals were proven right and prices on their bonds rose, he said.

Industrial development revenue bonds are usually longer-maturing bonds, Fabian said. Increasing demand this year for longer-term bonds have helped the prices of industrial development revenue bonds.

“The high-yield funds have had massive inflows this year,” Fabian said. That has compelled them to buy high-yield bonds from this sector, he said.

Overall, the muni sector has had a 6.9% total return, according to the B of A data. The general obligation sector has had the weakest showing, bringing in 5.4%. By comparison, the revenue bond sector has had a total return of 7.5%.

B of A Merrill has also released data on its muni and other fixed-income indexes’ performance in the year so far.

The AAA index, AA index, A index and BBB index all show positive price returns for the year so far. However, there is a continuum from a 1.1% price rise for the AAA index to a 5.5% price increase for the BBB index.

Since September 30 the price return has been -0.224% for AAA, -0.207% for AA, -0.084% for A, and 0.087% for BBB.

“The spread of BBB-rated munis has decreased for the month,” wrote B of A Merrill municipal research strategist Tian Xia. “Therefore, the BBB-rated munis outperformed for the month. Because the 10-year AAA muni yield has increased by two basis points for the month, the AAA muni’s price return was shown negative.”

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