As muni bonds slump again, Bill Gross buys for himself
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Tax-free municipal bond prices took another pounding on Monday as investors continued to retreat from the market after more than a month of turmoil.
Popular muni mutual fund share prices fell to their lowest levels of the year as rising market yields on munis devalued older bonds.
The annualized yield on the Bond Buyer index of 40 long-term muni bonds nationwide (charted below) jumped to 5.59%, up from 5.51% on Friday and the highest since August 2009.
Monday’s sell-off stemmed in part from expectations that the federally subsidized Build America Bond program, which for the last two years has allowed state and local governments to issue taxable muni bonds with interest partly paid by Uncle Sam, will die for good on Dec. 31.
The Obama administration wanted to extend the program but Republicans opposed it. The extension didn’t make it into the tax-cut bill advanced by the Senate on Monday.
With the program about to expire, municipalities and agencies including the Metropolitan Water District of Southern California are rushing to issue Build America Bonds in the final three weeks of the year. That additional supply is further depressing muni prices, analysts said.
Munis’ troubles in part reflect investors’ dimmed appetite for bonds in general over the last two months. Expectations of a stronger economy in 2011 have helped to push up longer-term interest rates nearly across the board since mid-October as some investors have sold bonds to buy stocks.
The muni market can be more volatile than other bond sectors because trading is thin; it doesn’t take much selling to cause a steep decline in muni prices and a jump in yields. Four straight weeks of net outflows from muni bond funds, as some investors have sold, have further weakened the market.
Munis weren’t helped on Monday even though U.S. Treasury bond yields pulled back slightly. The 10-year T-note yield eased to 3.28% from 3.29% on Friday.
But with long-term muni yields up 0.75 percentage point or more just since mid-October, some investors see bargains.
Bill Gross, founder of bond fund giant Pimco in Newport Beach, last week boosted his personal stakes in five of Pimco’s “closed-end” muni funds, bond portfolios that trade on the New York Stock Exchange and that often use borrowed money to leverage their bond holdings. Gross, who disclosed the purchases in filings he made with the Securities and Exchange Commission, was buying for himself, not for his Pimco Total Return bond fund.
The share price of one of the funds that Gross bought, the Pimco California Municipal Income Fund, fell from $14.18 on Oct. 19 to as low as $11.42 on Monday, a drop of almost 20%. The shares rebounded somewhat on Monday to close at $11.75, up 1 cent for the day. At that price the fund’s annualized tax-free yield is about 7.9% based on its recent monthly dividend payments. Gross has stepped up to buy other Pimco closed-end bond funds when they’ve tumbled. He didn’t return a phone call seeking comment on his latest purchases.
But Cecilia Gondor, a veteran analyst at Thomas Herzfeld Advisors in Florida, which specializes in closed-end funds, said that even though the share prices of the Pimco muni funds have plunged, four of the five that Gross bought still were trading at premiums to the underlying portfolios’ net asset value per share.
Gondor said her firm preferred to buy closed-end funds whose stocks were priced below the funds’ net asset values -- a way to buy $1 worth of assets for, say, 90 cents.
She said Herzfeld was buying shares of funds such as the Invesco California Insured Municipal Income Trust, which fell 1.7% to a 52-week low of $12.35 on Monday. That was 11% below the portfolio’s net asset value of $13.88 a share.
But note: Buying closed-end muni bond funds at a discount is no guarantee the shares won’t fall further if the current sell-off deepens.
-- Tom Petruno