Muni bond sell-off deepens after last week's losses
The municipal bond market is getting pounded again Monday after heavy losses last week, as more investors rush to sell and potential buyers stay away.
Analysts and traders say the muni market has been hit by the perfect storm: The surprising jump in U.S. Treasury yields over the last week has driven interest rates in general higher, at the same time that states and municipalities are flooding the market with new issues -- including $14 billion in debt to be sold by California in the next two weeks.
What’s more, expectations that the 2001 and 2003 federal income tax cuts will be extended, rather than allowed to expire on Dec. 31, may have dimmed some investors’ appetite for tax-free interest since the GOP sweep in the elections on Nov. 3.
The sell-off has hammered many exchange-traded funds that own portfolios of muni bonds. ETFs are favorite tools of traders looking to play market trends, so the shares can be highly volatile.
The share price of the iShares S&P National AMT-Free bond fund, a popular fund that buys muni issues exempt from federal income tax and from the alternative minimum tax, was trading at $101.28 at about 12:45 p.m. PST, down 1.6% from Friday and down 3.7% from a week ago.
Analysts said the market was facing a virtual “buyer’s strike” as investors now have simply stepped to the sidelines after last week’s slide.
“A lot of folks are saying this is the worst liquidity they’ve seen in two years,” said Joel Silva, a fund manager at iShares in San Francisco.
As the few buyers in the market demand sharply higher yields, the effect is to push down the prices of outstanding bonds.
The declines have been brutal in shares of many smaller muni ETFs and so-called closed-end funds that focus on niche markets, including California muni issues.
The Pimco California Municipal Income Fund was trading at $12.04 a share, down 5.6% for the day and down 13.4% from a week ago.
-- Tom Petruno