Muni bonds hit by more selling on default fears
Share prices of popular municipal bond mutual funds slid to new 52-week lows on Wednesday, a sign that sellers still are dominating in the market despite the jump in yields over the last three months.
Meredith Whitney -- the Wall Street banking analyst who last month predicted on CBS’ “60 Minutes” that a wave of muni defaults was coming -- reiterated her grim view on CNBC on Wednesday, further darkening the mood.
As bond prices fell, yields rose. The annualized tax-free yield on a Bond Buyer index of 40 long-term muni bonds nationwide (charted below) jumped to 5.77%, up from 5.67% on Tuesday and a two-year high.
The muni market is in the second phase of a sell-off that began in early November. In the first phase the market was rocked by the general rise in longer-term interest rates and by a rush of new bond issuance by many states and municipalities.
More recently investors have been spooked by fears of worsening state and local government budget woes.
There was more of that kind of chatter on Wednesday, after JPMorgan Chase & Co. CEO Jamie Dimon was quoted as warning muni investors to be “very, very careful" because of the risk of rising defaults.
Also, Whitney told CNBC that the first group of defaults she expects will be followed by “indiscriminate selling” by panicked muni investors, presumably leading to even lower bond prices and higher yields. “Because there has been such complacency in the market and muni investors have been talked down to for so long -- ‘There's nothing to worry about, there's nothing to worry about’ -- they'll just fly," she said.
Other bond market pros have sought to discredit or downplay Whitney’s predictions, but confidence in the market remains in short supply. News of Illinois' decision Wednesday to raise personal income taxes 66% to close its huge budget gap failed to spark a rally in bond prices.
Tax-free interest rates at current levels should be enough to attract individual investors hungry for high yields, yet “everyone is still sitting on their hands,” said Joe Lee, a muni trader at De La Rosa & Co. in L.A.
“There is retail demand at these levels, but it’s not enough,” said Matt Fabian, senior analyst at research firm Municipal Market Advisors.
Muni funds had net redemptions of $2.15 billion in the seven days ended Jan. 5, the ninth straight week of outflows, though the pace of withdrawals has been slowing since mid-December.
Since mid-November the funds have seen a net $22.7 billion leave. That’s about 4.5% of total assets, which stood at $500 billion as of Nov. 30.
The question now is whether the latest decline in fund share prices will fuel more redemptions -- or finally bring in an army of bargain-hunters.
Shares of the Franklin California Tax-Free Income fund, one of the biggest muni funds, slid 6 cents, or 0.9%, to $6.59 on Wednesday, the lowest price since August 2009. The fund’s shares have slumped 9.1% since the beginning of September.
The Vanguard Intermediate-Term Tax-Exempt fund, which owns a national portfolio of muni issues, dropped 5 cents, or 0.4%, to $13.17 a share on Wednesday, the lowest price since July 2009.
-- Tom Petruno
Photo: Meredith Whitney. Credit: CNBC