Tags: fund | withdrawals | Treasurys | Fed

Accelerating Fund Withdrawals Extend Biggest Losses

Monday, 16 December 2013 09:11 AM

The largest wave of withdrawals from municipal-bond mutual funds since August is extending the $3.7 trillion market’s worst losses in five years.

As speculation mounts that the Federal Reserve is preparing to reduce its bond purchases, individuals yanked $1.9 billion from muni funds last week, Lipper US Fund Flows data show. Outflows have tallied a record $57.5 billion this year, driving munis to their first annual loss since 2008, according to Standard & Poor’s data.

Yields on city and state debt set a three-month high last week as localities issued the most bonds since 2010. Asset managers making room in their portfolios for the new securities helped fuel the run-up in yields. Even as supply is set to sink, fund withdrawals and bets on higher interest rates in 2014 signal more losses ahead, said Dan Toboja at Ziegler Capital Markets, which underwrites and trades munis.

“Outflow numbers are huge, you’ve got year-end tax-loss selling, you’ve got taper concerns,” said Toboja, vice president of muni trading in Chicago at Ziegler. “We still have a lot of forces helping move yields up. We’re not out of the woods.”

Doubled Yields

Municipal bonds have joined losses this year across fixed-income assets as investors speculate that a growing economy will lead borrowing costs higher. Yields have almost doubled since setting generational lows a year ago.

The Federal Open Market Committee will start slowing the central bank’s bond purchases at its Dec. 17-18 meeting, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, up from 17 percent in a Nov. 8 survey. Others predicted tapering will start in 2014.

Local bonds have suffered steeper declines than corporate securities following Detroit’s record bankruptcy in July and amid growing concern that Puerto Rico’s shrinking economy will make it harder for the commonwealth to repay its debt. Moody’s Investors Service last week put the U.S. territory on review for a rating cut to junk.

Investors are looking to reduce capital-gains taxes by selling munis to offset profits in stocks, said Rick Taormina, who oversees $30 billion of local debt at J.P. Morgan Asset Management in New York. The municipal universe has lost 2.5 percent this year, after earning 7.4 percent last year, S&P data show. In the equities market, the S&P 500 index of shares has risen about 24 percent in 2013.

Institutional bondholders such as mutual funds put $1.2 billion of munis up for sale on Dec. 10, the most since August, Bloomberg data show.

‘Taking Losses’

Portfolio managers are “taking losses where we can, and using that as an opportunity to shift portfolios” into securities with higher yields, said Taormina.

Investors also wanted to sell to raise cash for last week’s $13 billion slate of deals, Toboja and Taormina said.

Some of the week’s biggest offers rallied after they were priced, showing some investors are attracted to tax-exempt debt following five weeks of declines.

New York State Thruway Authority bonds due in May 2019 priced to yield 2.2 percent, and subsequently traded at an average of 2.01 percent, Bloomberg data show. Securities from New York’s Utility Debt Securitization Authority maturing in December 2035 traded at 4.04 percent on Dec. 13, down from the initial 4.21 percent.

Yield Draw

The yields may have drawn non-traditional muni investors, such as asset managers who typically purchase taxable obligations, said Clark Wagner, director of fixed income in New York at First Investors Management Co. The company oversees about $1.5 billion of local debt. Fund managers may have also bought the new deals because few remain in 2013, he said.

“The muni market has always been a wider and stronger market than just fund flows indicate,” said David Manges, muni trading manager at BNY Mellon Capital Markets LLC in Pittsburgh.

Withdrawals from muni funds through Dec. 11 marked the 29th consecutive week of outflows, one week short of matching the record in 2000, Lipper data show. The exodus will probably extend through year-end, Manges said.

Money managers will have fewer bonds to choose from this week. Issuers from Massachusetts to Washington are selling about $2.3 billion in long-term debt, Bloomberg data show. The $10 billion drop in volume is the biggest in at least a decade for a two-week span that doesn’t include a holiday.

Benchmark 10-year yields enter the week at 2.96 percent, after reaching 3.05 percent on Dec. 11, the highest since Sept. 12. The interest rate compares with 2.86 percent on similar-maturity Treasurys.

The ratio of the interest rates, a measure of relative value, is about 103 percent, compared with a five-year average of 102 percent. The higher the figure, the cheaper munis are compared with federal securities.

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The largest wave of withdrawals from municipal-bond mutual funds since August is extending the $3.7 trillion market's worst losses in five years.
Monday, 16 December 2013 09:11 AM
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