John Hirsch, 57, has been buying municipal bonds during the past four months, taking advantage of falling prices as muni funds are forced to sell them to cover withdrawals.
“I have no interest in trading bonds,” said Mr. Hirsch, a consultant to the medical industry. “I'm going to hold until maturity, and at maturity, I'll get the face value back.”
Investors have withdrawn about $47 billion from U.S. muni bond funds since Nov. 10, pulling out more money than they have put in for 24 weeks straight, according to Lipper's U.S. weekly fund flows. Retail investors purchased about $3 billion more in individual municipal bonds in the first quarter than in the comparable period last year, according to data on trades of $100,000 or less from the Municipal Securities Rulemaking Board, which regulates muni dealers.
Surging investor withdrawals force mutual fund managers to sell in a falling market. Prices for investment-grade muni bonds dropped 4.6% in the six-month period through April, as measured by the
Bank of America Merrill Lynch Municipal Master Index.
“The people who are redeeming are the dumb money, because they're redeeming into a market where prices are down,” said Alexandra Lebenthal, chief executive of Lebenthal & Co. LLC, which manages about $170 million in municipal bond
separately managed accounts. Her firm has received about $30 million in new money since December.
American households own $1.1 trillion of municipal debt, or about 37% of the market, and represent the largest holders, according to
Federal Reserve data.
In December, Meredith Whitney, the bank analyst who correctly predicted
Citigroup Inc.'s 2008
dividend cut, said on CBS' “60 Minutes” that there would be 50 to 100 “sizable” municipal bond defaults.
Since July 2009, there have been 284 defaults on municipal bonds, representing about $8.9 billion of issuance or about 0.3% of the $2.9 trillion market, according to data from the
Federal Reserve and Municipal Market Advisors, a research firm. Investment-grade municipal bonds had a cumulative 10-year default rate of 0.06% from 1970 to 2009, according to Moody's Investors Service.
Since Ms. Whitney's comments, “the mutual funds and the bond ETFs have taken it on the chin,” said Robert Kane, chief executive of BondView.com, which provides bond portfolio analysis for individual investors.
Investors sold all categories of municipal bond funds, which range from single-state bond funds to funds that mainly invest in short- or long-term securities, in the five-month period through March, according to Morningstar Inc.
“Investors have been pretty indiscriminate about what they've been selling,” said Miriam Sjoblom, a bond fund analyst for Morningstar.
Outflows have been greatest among high-yield municipal funds, where investors withdrew 11% of their assets, and among funds that invest in long-term bonds, where investors took out 8.1%. Outflows have been lowest among funds that invest in short-term investment-grade municipal bonds, where investors have withdrawn 5.3%.
“Those who are sellers in some part are reacting to newspaper headlines and thinking, "Well, I'd better take some money off the table because the risks are elevated,'” said Josh Gonze, who helps oversee about $6.5 billion in municipal bond assets as co-portfolio manager of six mutual funds for Thornburg Investment Management Inc.
Buyers of individual bonds through discount brokers have been “aggressively” accumulating issues in the last few months, said Chris Shayne, senior market strategist for BondDesk Group, a bond marketplace that works with dealers, financial advisers and discount brokers such as E*Trade Financial Corp. Individual investors cannot purchase bonds directly with BondDesk.
Investors with TD Ameritrade Holding Corp. brokerage accounts purchased 22% more individual municipal bonds in the first quarter of 2011 than they did in the year-earlier period, according to Perry Guarracino, director of fixed income for the company.
“They know what they're looking for, and waiting for certain yield levels” before buying, he said.
