Just three mutual funds have holdings in general-obligation bonds issued by Harrisburg, Pa., which said that it is defaulting on a $3.29 million payment.
That is good news for fund investors, but some observers said Harrisburg's announcement could be just the tip of the iceberg in terms of defaults.
In a letter to its paying agent,
BNY Mellon Corporate Trust, on Monday, Harrisburg's interim chief of staff and business administrator, Robert Kroboth, said that the city would default on the payment, The Wall Street Journal reported.
The payment, which was due in two weeks, is insured by Ambac Financial Group Inc. Ambac issued a statement today stating that it would cover the payment.
That is lucky for investors in Eaton Vance Corp.'s Pennsylvania Limited Maturity Fund Ticker:(EXPNX) and Pennsylvania Municipal Income Fund Ticker:(ETPAX) which had 1.98% and 0.38% of the total assets in their portfolios, respectively, invested in general-obligation bonds issued by Harrisburg as of June 30, according to Lipper.
The MainStay High Yield Municipal Bond Fund Ticker:(MMHAX) had 0.71% invested in general-obligation bonds issued by Harrisburg as of July 30, according to the firm.
The fact that these funds had such small allocations to the general-obligation bonds issued by Harrisburg is good news for investors, said Marilyn Cohen, president and chief executive of Envision Capital Management Inc., which oversees $275 million in bonds for individuals.
“The bad news is that the handwriting about Harrisburg has been on the wall for a long time. We knew the problems were large for some time now,” Ms. Cohen said.
“These are short-duration bonds, and they are insured,” said John Puccio, a spokesman for New York Life Investment Management, adviser to the MainStay Funds.
Robyn Tice, an Eaton Vance spokeswoman, declined to comment.
Harrisburg's announcement may be just the start of other defaults down the road, Ms. Cohen said.
And there is a question as to how long insurers will continue to insure such payments, said Jeff Tjornehoj, senior research analyst at Lipper.
“Now you wonder if there was an issue with subprime mortgages,” he said. “Next you should wonder if there is an issue with ‘subprime' municipalities.”
