Municipal-Bond Funds Have Biggest Withdrawals Since 1992 on Issuer Outlook
Investors withdrew the most in almost 19 years from open-end U.S. municipal-bond funds in the week ended Nov. 17 as concern increased that cities’ and states’ finances are deteriorating.
Municipal funds lost $3 billion in redemptions in the week, the most since the week ending Jan. 8, 1992, according to Tom Roseen, senior analyst at research firm Lipper FMI. The funds had added $34 million in the previous week, Roseen said.
“It’s become a negative-feedback loop,” Thomas Metzold, co-director of municipal investments at Boston-based Eaton Vance Corp., said yesterday in a telephone interview. “Funds have to sell bonds to meet redemptions, putting pressure on prices, causing more redemptions.”
Muni-bond fund prices have plunged an average 3.7 percent in the past month amid concern about renewed inflation, a flood of supply from issuers and speculation that Congressional Republicans, after winning control of the U.S. House in the Nov. 2 midterm elections, will block aid to cities and states.
Yields on top-rated tax-exempt bonds due in 10 years jumped 23 basis points on Nov. 17, the biggest gain since March 2009. A basis point is one-hundredth of a percent. The bond yields climbed to 3 percent yesterday, a seven-month high, according to a Bloomberg Valuation index.
“This began once the elections were completed and it was evident Republicans would have a majority in the House of Representatives,” Metzold said.
The voting results cast uncertainty over the level of federal support states and cities will get in 2011 and over the prospects for an extension of the Build America Bonds program, he said.
The program, set to expire Dec. 31, typically provides a 35 percent subsidy on interest payments for issuers of taxable muni bonds. More than $150 billion in Build America Bonds had been issued as of Oct. 31, according to the Treasury Department.
Anticipation of its expiration, which could increase the supply of traditional tax-exempt muni bonds, has helped push prices down, Metzold said.
Of 610 open-end muni funds tracked by Bloomberg, three had a positive return in the past month. California issuers fell the most, dropping an average of 5 percent in the month ended Nov. 18, data from Morningstar Inc. show.
The $30.8 billion Vanguard Intermediate-Term Tax-Exempt Fund, the largest municipal bond fund, fell 3 percent in the month ended Nov. 18, according to data compiled by Bloomberg. It gained 2.6 percent this year.
Closed-end municipal-bond funds declined an average of 6.4 percent in the month through Nov. 18, according to Morningstar. Their deeper loss reflects their greater use of leverage and their ability to trade at a discount or premium to net-asset values.
The funds, on average, traded at a 0.55 percent premium to their net-asset values on Oct. 15, according to Cecilia Gondor, a closed-end fund analyst at Thomas J Herzfeld Advisors Inc. in Miami. That fell to 0.36 percent on Nov. 17.
Closed-end muni funds extended their losses yesterday. The Nuveen Municipal Closed-End Index declined 1 percent yesterday and 7.4 percent in the past month. The $321.4 million Pimco Municipal Income Fund III dropped 4.1 percent yesterday and 9.8 percent in the last month, and the $190.6 million Nuveen Municipal High Income Opportunity Fund 2 fell 3.2 percent yesterday and 9.5 percent for the month.
Closed-end funds issue a fixed amount of shares that trade on an exchange. When investors exit, they sell via the exchange, as opposed to open-end shareholders, who redeem shares at net- asset value with the fund.
Municipal bond funds received $35 billion in deposits this year before last week’s withdrawals. The funds held $515 billion at the end of September, according to the ICI.
Eaton Vance and Western Asset Management, a unit of Baltimore’s Legg Mason Inc., have rushed to reassure clients in an attempt to prevent further withdrawals.
“This is a cash-flow driven event, it’s not a credit event,” Joseph P. Deane, a muni-fund manager for Pasadena, California-based Western Asset Management, said yesterday in a conference call with financial advisers. “The market is incredibly cheap.”
Deane runs the $5.7 billion Legg Mason Western Asset Managed Municipals Fund, part of Western’s $38 billion in muni- bond assets. It dropped 4.5 percent in the past month.
Stephen Ban, a managing director at Chicago-based Nuveen Asset Management, said the Federal Reserve’s plan to buy $600 billion in assets as part of a monetary-stimulus effort was also depressing muni-bond prices.
“Treasury rates are rising and munis have taken their cue from that on top of the supply overhang” that the Build America Bond program’s expiration may create, Ban said.
Nuveen, a unit of private-equity firm Madison Dearborn Partners LLC, manages $73 billion in municipal-bond assets, including those in open-end and closed-end funds.
Along with Deane and Metzold, he called the current conditions a buying opportunity.
“I put my entire year-end bonus in my fund yesterday,” Metzold said, referring to the $5.8 billion Eaton Vance National Municipal Income Fund. The fund lost 8.2 percent in the past month.
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