Municipal Funds Fall Most in Two Years as Bonds Drop, Borrowing Costs Rise
Funds that invest in debt securities issued by state and local governments fell the most in two years today as losses in the municipal bond market were exacerbated by a rise in their cost of borrowing.
The Nuveen Municipal Closed-End Index dropped 4.4 percent, the biggest decline since Oct. 15, 2008, after losing 6 percent last week, the largest retreat since February 2009, data compiled by Bloomberg show. Nuveen Ohio Quality Income Municipal Fund tumbled 7.5 percent, its biggest drop since Oct. 10, 2008, and the BlackRock Investment Quality Municipal Trust slid 7.2 percent, the most since Dec. 5, 2008.
Yields on top-rated 10-year U.S. municipal debt rose the most since March today as states and cities prepared to borrow about $16.2 billion this week, the most on record, according to data compiled by Bloomberg dating to 2003. Declines in closed- end funds may have been worsened because they borrow money to make their purchases, according to Peter Boockvar, a strategist with Miller Tabak & Co. in New York.
“The closed-end funds have a lot leverage in them, so the moves get exaggerated,” Boockvar said. “The main catalyst is that the spike in U.S. interest rates is obviously going to put pressure on anything that is priced off it.”
Closed-end mutual funds, unlike their open-ended competitors, sell common shares to investors that are publicly traded on exchanges. They also borrow to boost returns by selling preferred stock that’s similar to bonds. Funds with the biggest losses today, including Nuveen’s Ohio Quality, BlackRock’s Investment Quality, Dreyfus Strategic Municipals Inc. and Nuveen North Carolina Premium Income Municipal Fund employ leverage to boost returns, according to company websites.
AAA 10-year municipal bond yields increased 7 basis points, or 0.07 percentage point, to 2.87 percent, according to data from Municipal Market Advisors, an independent research firm based in Concord, Massachusetts. The yield is the highest since July. Yields move in the opposite direction of prices.
Investors are dumping municipal bonds along with U.S. Treasuries, which fell for a third day today, sending 30-year yields to the highest since May. Treasury prices fell as a group including former Republican government officials and economists urged the Federal Reserve to rethink quantitative easing and a report on retail sales showed quickening economic growth.
Representatives from the Nuveen Ohio Quality Income Municipal Fund, the BlackRock Investment Quality Municipal Trust, Dreyfus Strategic Municipals and Nuveen North Carolina Premium Income Municipal Fund didn’t return messages seeking comments after the close of normal business hours.
Municipal bonds posted losses as California prepared to sell $10 billion of one-year notes to boost cash on hand. Treasurer Bill Lockyer also is selling $3.75 billion of long- term obligations starting later this week. Issuers plan to offer more than $20.1 billion in the next 30 days, according to the Bloomberg visible supply index on Nov. 12, the most since Oct. 23, 2009, and almost double the daily average this year.
The $2.8 trillion municipal-securities market recorded its best year in 2009 since 2000, with the average tax-exempt bond gaining 14.4 percent, according to indexes compiled by Bank of America Corp.’s Merrill Lynch & Co. Munis were bouncing back from a 3.9 percent drop in 2008, the worst since 1999, as investors fled all but the safest securities during the credit crisis. The Nuveen Municipal Closed-End Index has gained 77 percent since its October 2008 low.
“Closed-end fund investors tend to overreact on bad news,” said Cecilia Gondor, an analyst at Thomas J. Herzfeld Advisors Inc. in Miami. “This particular group of funds has had the moon and stars aligned for a long time now, they’re leveraged, they’re borrowing short-term and investing long-term which has helped boost the dividend they can pay, but now things are starting to turn around and everyone wants to be the first one out the door.”
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