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Muni Investors Undeterred by Jefferson Bankruptcy Add to Mutual-Bond Funds

Investors added money to municipal- bond mutual funds for a sixth straight week, undeterred by the biggest municipal bankruptcy in U.S. history.

They deposited about $500 million in the period ended Nov. 16, Lipper US Fund Flows said yesterday, bringing the six-week total to $2.2 billion.

The Chapter 9 filing by Jefferson County, Alabama, on Nov. 9 was expected by investors in the $2.9 trillion tax-exempt market and doesn’t portend more failures, John Hallacy, head of municipal research at Bank of America Merrill Lynch Global Research, said in an interview.

“A lot of us in the market anticipated that something like this potentially would happen,” Hallacy said. “It’s been working its way through for three years.”

The county is stuck with more than $3 billion of sewer- system bonds it can’t afford because of wrong-way bets with interest-rate derivatives.

Tax-exempts are an appealing investment because of their total returns and relative value to U.S. Treasuries, Hallacy said.

Municipal bonds have earned 8.8 percent this year, compared with 9.2 percent for Treasuries, according to Bank of America Merrill Lynch indexes that include prices and interest income.

Higher Yields

Tax-exempt bonds offer higher yields than Treasuries. The ratio between top-rated municipals maturing in 30 years and equivalent federal bonds was 129.3 percent yesterday, near the 2011 high of 130.2 percent on Oct. 3, according to data compiled by Bloomberg.

“It’s still viewed as a product where the returns are pretty good and, overall, the stability is pretty good,” Hallacy said.

Municipal-bond defaults so far this year total $2.8 billion, less than the $4.4 billion for all of 2010 and the $8.6 billion of 2009, according to data compiled by Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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