Muni bond funds drop, investors bail for first time in months

Open-end U.S. municipal-bond funds dropped an average 3.7 percent in the past month as investors withdrew money for the first time in seven months.
MAY 23, 2011
Open-end U.S. municipal-bond funds dropped an average 3.7 percent in the past month as investors withdrew money for the first time in seven months. Funds focused on long-term debt from California issuers fell the most, dropping an average of 5 percent in the month ended Nov. 18, data from Morningstar Inc. show. Muni funds lost $115 million to withdrawals in the week ended Nov. 10, the first net redemptions since April, according to the Investment Company Institute, a Washington-based fund-industry trade group. “It’s become a negative-feedback loop,” Thomas Metzold, co-director of municipal investments at Boston-based Eaton Vance Corp., said yesterday in a telephone interview. “Funds have to sell bonds to meet redemptions, putting pressure on prices, causing more redemptions.” Muni-bond prices have plunged amid concern about renewed inflation, a flood of supply from issuers and speculation that Congressional Republicans, after winning control of the U.S. House in the Nov. 2 midterm elections, will block aid to cities and states. Yields on top-rated tax-exempt bonds due in 10 years jumped 23 basis points on Nov. 17, the biggest gain since March 2009. A basis point is one-hundredth of a percent. The bond yields climbed to 3 percent yesterday, a seven-month high, according to a Bloomberg Valuation index. “This began once the elections were completed and it was evident Republicans would have a majority in the House of Representatives,” Metzold said. Build America The voting results cast uncertainty over the level of federal support states and cities will get in 2011 and over the prospects for an extension of the Build America Bonds program, he said. The program, set to expire Dec. 31, typically provides a 35 percent subsidy on interest payments for issuers of taxable muni bonds. More than $150 billion in Build America Bonds had been issued as of Oct. 31, according to the Treasury Department. Anticipation of its expiration, which could increase the supply of traditional tax-exempt muni bonds, has helped push prices down, Metzold said. Of 610 open-end muni funds tracked by Bloomberg, three had a positive return in the past month. The $30.8 billion Vanguard Intermediate-Term Tax-Exempt Fund, the largest municipal bond fund, fell 3 percent in the month ended Nov. 18, according to data compiled by Bloomberg. It gained 2.6 percent this year. Closed-End Funds Closed-end municipal-bond funds declined an average of 6.4 percent in the month through Nov. 18, according to Morningstar. Their deeper loss reflects their greater use of leverage and their ability to trade at a discount or premium to net-asset values. The funds, on average, traded at a 0.55 percent premium to their net-asset values on Oct. 15, according to Cecilia Gondor, a closed-end fund analyst at Thomas J Herzfeld Advisors Inc. in Miami. That fell to 0.36 percent on Nov. 17. Closed-end muni funds extended their losses yesterday. The Nuveen Municipal Closed-End Index declined 1 percent yesterday and 7.4 percent in the past month. The $321.4 million Pimco Municipal Income Fund III dropped 4.1 percent yesterday and 9.8 percent in the last month, and the $190.6 million Nuveen Municipal High Income Opportunity Fund 2 fell 3.2 percent yesterday and 9.5 percent for the month. Closed-end funds issue a fixed amount of shares that trade on an exchange. When investors exit, they sell via the exchange, as opposed to open-end shareholders, who redeem shares at net- asset value with the fund. Reassuring Investors Municipal bond funds received $35 billion in deposits this year before last week’s withdrawals. The funds held $515 billion at the end of September, according to the ICI. Eaton Vance and Western Asset Management, a unit of Baltimore’s Legg Mason Inc., have rushed to reassure clients in an attempt to prevent further withdrawals. “This is a cash-flow driven event, it’s not a credit event,” Joseph P. Deane, a muni-fund manager for Pasadena, California-based Western Asset Management, said yesterday in a conference call with financial advisers. “The market is incredibly cheap.” Deane runs the $5.7 billion Legg Mason Western Asset Managed Municipals Fund, part of Western’s $38 billion in muni- bond assets. It dropped 4.5 percent in the past month. Stephen Ban, a managing director at Chicago-based Nuveen Asset Management, said the Federal Reserve’s plan to buy $600 billion in assets as part of a monetary-stimulus effort was also depressing muni-bond prices. Fed Easing “Treasury rates are rising and munis have taken their cue from that on top of the supply overhang” that the Build America Bond program’s expiration may create, Ban said. Nuveen, a unit of private-equity firm Madison Dearborn Partners LLC, manages $73 billion in municipal-bond assets, including those in open-end and closed-end funds. Along with Deane and Metzold, he called the current conditions a buying opportunity. “I put my entire year-end bonus in my fund yesterday,” Metzold said, referring to the $5.8 billion Eaton Vance National Municipal Income Fund. The fund lost 8.2 percent in the past month.

Latest News

Advisor moves: Raymond James lands $1.25B team as Merrill loses two
Advisor moves: Raymond James lands $1.25B team as Merrill loses two

Iowa's Greenwood Wealth Partners exits D.M. Kelly as UBS and Ameriprise win Merrill Lynch recruits in California and Florida

Never a losing day: CFTC alleges $950 million forex Ponzi scheme
Never a losing day: CFTC alleges $950 million forex Ponzi scheme

Less than 1% of pool funds went to actual trading, CFTC says

Fintech bytes: Northwestern Mutual picks Jump for enterprise AI
Fintech bytes: Northwestern Mutual picks Jump for enterprise AI

Plus, SEIA builds a governed data foundation for its in-house AI and Snappy Kraken debuts a read-only marketing coworker for advisors.

People moves: AllianceBernstein names Onur Erzan as next CEO
People moves: AllianceBernstein names Onur Erzan as next CEO

Broadridge, Wedbush and Alaris Acquisitions have also filled senior wealth management roles with hires from J.P. Morgan, Osaic and SageView.

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains