Forced selling of munis seen as unlikely

A possible downgrade of municipal bond insurers has caused worries that mutual funds might be forced to sell off lower-quality issues that carry a high rating due to insurance. Some tax-free funds are required to hold certain amounts of higher-rated bonds. But observers said forced selling is unlikely. “Some money [from mutual funds] for sure would come out” in the event of a downgrade, said Matt Fabian, a Westport, Conn.-based senior analyst with Municipal Market Advisors. “But not all, because [funds] have different ways of interpreting [guidelines for] what they can hold.” Mutual fund “prospectus language is broadly enough conceived to prevent exactly that type of situation,” said Lawrence Jones, a mutual fund analyst at Morningstar Inc. in Chicago. Mr. Jones said some funds also can temporarily depart from their normal investment policy “in the event of extreme market stress.” This month, Fitch Investors and Moody's Investors Service said they were reviewing the bond insurers due to their exposure to CDOs. For the full report, see the upcoming Nov. 19 issue of InvestmentNews.