Nuveen’s 8.56% Annualized High-Yield Returning Most: Muni Credit
John Miller at Nuveen Asset Management LLC, who beat all of his municipal bond-fund rivals last quarter, is betting a U.S. housing rebound will help extend the longest rally since 2010 in high-yield local debt.
The Nuveen High Yield Municipal Bond Fund (NHMRX) earned 2.14 percent in the first three months of 2013. It outperformed all other open-ended, national muni funds that are at least three years old, oversee $500 million or more and target institutional clients, data compiled by Bloomberg show. Goldman Sachs High Yield Municipal Fund (GHYIX) followed with a 2.09 percent return.
Bond buyers seeking extra yield as the Federal Reserve holds its target interest rate near zero have spurred junk-grade munis to beat all tax-exempt debt for five straight quarters, the longest streak since December 2010. With residential real estate prices rising the most since 2006 last month, Miller, 46, is looking to land-secured munis to bolster earnings. Debt sold for multiple-housing developments is drawing Ben Barber, 43, who helps manage the Goldman Sachs fund in New York.
Many housing-related munis “are still undervalued,” said Miller, who’s based in Chicago. The $9.3 billion Nuveen fund also outpaced its peers for all of 2012. “We’re going to get more performance out of that sector.”
All 10 of the best-performing funds last quarter focus on speculative-grade munis, securities rated below BBB- by Standard & Poor’s or Baa3 by Moody’s Investors Service. The leaders all earned at least 1.1 percent in the period, double the gain of the broader local-debt market.
Buyers willing to take the extra risk have added $1.2 billion to high-yield muni mutual funds this year, after pouring in $9.6 billion in 2012, Lipper US Fund Flows data show.
They are escaping yields that remain below historical averages as the Fed extends its program of monthly bond purchases to bolster the economy. Twenty-year general obligations yielded 3.89 percent last week, compared with a five-decade average of about 5.9 percent, according to a Bond Buyer index.
While the rally in junk-grade munis has compressed their extra yield, Miller said the segment has more room to gain. His fund’s three-year average annual earning is 11.5 percent, better than 98 percent of its peers, Bloomberg data show.
The yield spread on 20-year high-yield munis over benchmark securities fell to 2.73 percentage points March 28, the smallest since 2010, Nuveen data show. Still, that gap has averaged 2.36 percentage points since 1995.
“It’s going to be more of an income story, but good attractive income,” said Miller, who oversees $86.5 billion of munis in total. “And there’s still a little bit more spread tightening to go.”
As a growing economy prompts bets that interest rates are set to rise, investors such as New York-based BlackRock Inc., the world’s largest asset manager, have recommended scaling back on lower-rated munis.
Higher interest rates will erode high-yield gains, according to Peter Hayes, head of munis at BlackRock, which oversees $109 billion of local debt. He suggests buying munis with a higher credit ranking, from four to six levels below the top grade.
Yields on 30-year Treasuries will climb about 0.5 percentage point to 3.38 percent by year-end, according to the median forecast of 55 analysts in a Bloomberg survey.
Barber, who helps manage $30 billion of munis at Goldman Sachs Asset Management, said he’s reduced the average maturity of his high-yield fund by six months to defend against the potential for rising interest rates. He’s also increased allocations of munis rated one to three steps above junk by 2 percent, while decreasing speculative-grade debt by the same amount.
He’s also looking to Puerto Rico for gains, boosting the $3.9 billion high-yield fund’s holdings of commonwealth debt in the first quarter to 7.2 percent, from 6.1 percent at the end of 2012.
Debt sold on the island, which is graded one step above junk by the three major rating companies, takes up about 3.2 percent of the Barclays Plc municipal index.
Miller is positioning the Nuveen fund to benefit as the housing market buoys the national economy in its rebound from the 18-month recession that ended in June 2009.
The Fed last week said the economic expansion remained “moderate,” with the help of rising housing prices and increasing demand for home loans. Residential property values in 20 cities climbed 8.1 percent in January from the same month last year, the biggest increase since June 2006, according to the S&P/Case-Shiller index.
Nuveen has revenue bonds backed by drywall distributor USG Corp. among its top 10 holdings, according to Bloomberg data as of March 31.
The debt, which is state tax-exempt and subject to the alternative-minimum tax at the federal level, financed a solid- waste facility in Pennsylvania.
In the $3.7 trillion municipal market this week, Wisconsin leads issuers planning to sell $7.7 billion of long-term debt, Bloomberg data show. Localities issued about $20 billion combined the past two weeks, the most since December.
Munis are gaining in the face of the supply wave. Ten-year benchmark munis yield 1.76 percent, the lowest since January, Bloomberg Valuation data show. That’s still eclipsing the 1.71 percent interest rate on comparable-maturity Treasuries.
The ratio of the two yields, at about 103 percent, is a measure of relative value between the two asset classes. The percentage has been below 100 on only one day in the past month, showing munis have cheapened in comparison with federal debt.
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