Vanguard Withdraws Request to Open Three Muni-Bond Funds Amid `Volatility'

Vanguard Group Inc., the world’s largest mutual-fund company, withdrew a request filed last year with regulators to open three municipal-bond index funds amid concern that state finances may deteriorate.

“We’ve deferred the launch for an indefinite period of time because we believe market volatility could impact the funds’ ability to track their benchmarks and deliver their objectives,” John Woerth, a spokesman for the Valley Forge, Pennsylvania-based company, said today in a telephone interview. Permission from the U.S. Securities and Exchange Commission for the offerings and associated exchange-traded funds to open was set to expire tomorrow, he said.

Analyst Meredith Whitney said on CNBC yesterday that she expected accelerated withdrawals from the municipal-bond market as state finances deteriorate in the next six months. Last month Whitney, who correctly predicted Citigroup Inc.’s dividend cut in 2008, forecast 50 to 100 significant muni-bond defaults this year totaling “hundreds of billions” of dollars.

Investors have pulled a net $22.7 billion from municipal- bond mutual funds in the past nine weeks, according to data from the Investment Company Institute in Washington.

Woerth said Vanguard’s decision shouldn’t be taken as lack of faith on the muni-bond market.

“We believe the attention-grabbing, doomsday headlines overreach reality,” according to a commentary the firm plans to publish later this month, Woerth said.

Gross Counters Whitney

Bill Gross, who manages the world’s biggest mutual fund at Pacific Investment Management Co., said yesterday he doubted there would be many local-government bankruptcies. Gross, who runs the $241 billion Pimco Total Return Fund, spoke on Bloomberg Television’s “InBusiness.”

The proposed Vanguard funds would have covered long-term, intermediate and short-term segments of the market. The initial filings were made in June.

Vanguard, which manages about $1.6 trillion for clients, offers ETFs as a share class of index mutual funds, a patented version of the product. ETFs are listed on an exchange and trade throughout the day like stocks. Most mutual funds can be traded once a day, after the market closes.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net.

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