While Muni Fund Investors Flee, Others Pounce

The fiscal crisis in states and cities is a buying opportunity for John Hirsch. He's been snapping up municipal bonds since the beginning of the year, taking advantage of falling prices as muni mutual funds are forced to sell bonds to cover withdrawals. Hirsch, 57, is looking for income and isn't worried about fluctuating market values. "I have no interest in trading bonds," says Hirsch, a consultant to the medical industry in Clermont, Fla. "I'm going to hold until maturity, and at maturity I'll get the face value back."

Investors have withdrawn about $48.5 billion from U.S. municipal-bond mutual funds since Nov. 10, pulling money for 25 weeks straight, according to Lipper US Fund Flows, a research company in Denver. Those withdrawals have forced mutual fund managers to sell, putting downward pressure on prices. Investment-grade muni-bond prices have dropped 3.7 percent in the six months through May 6, as measured by the Bank of America Merrill Lynch (BAC) Municipal Master Index. That has driven yields on bonds in the index, which rise when prices fall, to 3.74 percent, which is equivalent to a taxable yield of 5.75 percent for an investor in the top 35 percent federal tax bracket. That's up from 3.46 percent on Nov. 10.