Muni bond fund redemptions jump again


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Redemptions from municipal bond funds accelerated last week as muni bond prices fell further.

Investors cashed out a net $4.85 billion from muni funds in the seven days ended Dec. 15, up from $1.26 billion the previous week, the Investment Company Institute said in a report Wednesday.


Last week’s total was the largest amount of redemptions since the muni market hit the skids in early November. The previous high was the $4.78 billion that left the funds the week ended Nov. 17.

Investors now have pulled a net $14.2 billion from muni funds since Nov. 3, or about 2.8% of assets. That isn’t much, relatively speaking, but redemptions can force muni fund managers to sell bonds to raise cash, putting more downward pressure on bond prices and upward pressure on yields.

Market interest rates on tax-free muni bonds began to surge early in November, in part reflecting rising longer-term interest rates overall. But the muni market has been hit harder than many other bond sectors: The annualized yield on the Bond Buyer index of 40 long-term muni bonds nationwide (charted below) rocketed as high as 5.73% last week, up from 4.86% in mid-October.

The market has calmed down somewhat in recent days as the jump in yields began to attract more buyers late last week. The yield on the Bond Buyer index was at 5.50% on Wednesday.

One factor that hit the muni market in November and again early last week: Congress’ decision to end 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.

With the Build America program terminating as of Dec. 31, municipalities that had been planning to borrow via those issues in 2011 may instead have to use conventional tax-free bonds. The prospect of a heavier supply of new tax-free bonds has added to concerns that muni yields could rise further.

But munis rallied Thursday and Friday, pushing prices up and yields down, after a Republican congressman said he would try to revive the Build America program in 2011.

The rise in longer-term interest rates in general since late October has dimmed investors’ previously ravenous appetite for bond mutual funds of all kinds. As rates rise, older bonds are devalued, which pulls down bond fund prices. Shares of some of the biggest bond funds have lost between 2% and 5% since early November.

Taxable bond funds, a category that includes giants such as Pimco Total Return, saw investors cash out a net $3.77 billion in the seven days ended Dec. 15, the second straight week of redemptions, the ICI said. The last time taxable funds had redemptions was during the financial-system meltdown of late 2008.

But the cash pulled from taxable bond funds has been minuscule so far -- less than 0.2% of total assets in two weeks.

-- Tom Petruno


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