Posted on 12/07/2008 7:43:58 AM PST by TigerLikesRooster
Muni-bond funds face record losses
Some funds down more than 30%, opening door for bargain hunters
By Sam Mamudi, MarketWatch
Last update: 3:32 p.m. EST Dec. 5, 2008
NEW YORK (MarketWatch) -- Investors who think municipal bond funds are a safe bet in troubled times may be in for a shock this year, with some muni funds seeing losses of more than 30%.
With the stock market down more than 40% and Treasury bond yields at 50-year lows, municipal bonds can seem an attractive option. And while some managers see once-in-a-lifetime bargains in the muni market, several funds have cratered.
As of Dec. 4, there were 12 muni funds down more than 30% this year -- nine from OppenheimerFunds, two from Eaton Vance Corp. (EV) and one from Nuveen Investments.
"These are really extreme numbers," said Lawrence Jones, senior mutual fund analyst at investment researcher Morningstar Inc. "It's safe to say that muni funds have never seen losses like this."
The losses at the Oppenheimer funds make for painful reading.
(Excerpt) Read more at marketwatch.com ...
Ping!
How do municipal bond funds lose value, unless there are municipalities defaulting? Can anyone explain this to me in English?
The Bush legacy keeps growing, and he hasn’t even left office yet.
If investing in Munis people have to be very careful about the Issuer and the source of repayment. Even then, I don't see how the Fiscal mess can be resolved without a de-facto default in the form of devaluation of the currency through inflation.
i.e., there are no clear ‘Safe Havens’ IMO.
Oppenheimer Rochester Michigan Muni Fund (ORMIX) losing 38.6%
Oppenheimer California Municipal Fund (OPCAX) off 36.2%
Eaton Vance's High Yield Municipals (ETHYX) was down 34%
National Municipals (EVHMX) is down 32.6%.
Nuveen High Yield Municipal Bond (NHMAX) was down 33.7%
While they are still paying, the value of the bond goes down, because the perceived risk of default goes up.
If you bought individual bonds and held them to maturity, you wouldn’t care unless there was a default. But these funds trade continually, and often use leverage. The credit difficulties have driven up their cost of funds, and driven down the mark-to-market values of their portfolios.
People will always have reasons to sell in good times and bad, but buying can always be postponed.
So what we are seeing in the municipal bond market is an increased risk of default. Interest rates are rising dramatically as investors are demanding record levels of compensation for taking the risk that issuers will not default. So the price of outstanding municipal bonds are dropping taking the share price of the bond funds with them.
Separate from the above 2 factors, I suspect a lot of hedge funds are dumping assets including municipal bonds. This forced selling drives down bond prices. Think of it as a huge marginal call on the levered players. They have to sell their most marketable securities to raise cash and that can include municipal bonds.
For the record, I do not invest in municipal bonds. I follow 3 guiding principles in my fixed income investing: quality, quality, quality. That is why I only buy direct obligations of the US Treasury.
Mark to market accounting. In other words, the fund has to carry a bond’s value at what it would bring in the open market today.
They haven’t really lost anything if the bonds are all held to maturity but will if the fund is forced to sell bonds to pony up cash for those selling out of the fund. I doubt this will happen, though.
Same with the high yield corporate bond funds. They all have been hit with this accounting requirement.
CA is discussing paying suppliers with IOUs... It is bad out there in the states. They have not been good stewards of the tax money they take, and expect.
You write: “For the record, I do not invest in municipal bonds. I follow 3 guiding principles in my fixed income investing: quality, quality, quality. That is why I only buy direct obligations of the US Treasury.”
If I had followed that naive strategy for the last 30 plus years my retirement fund would be 1/5 what it is today, even after losing 30% this year. Don’t you lie awake at night wondering what you could have done with 5 times as much retirement money as you have after investing in treasuries?
If you own individual issues that you can hold to maturity then what you say is true. That is if you own a bond that is guaranteed to pay off at 100 cents on the dollar at maturity then you can ignore price changes while the bond is outstanding. In this case the only risk you run is re-investment risk, that is the risk that interest rates are unfavorable at the time the bond matures and you want to purchase a new one.
I appreciate your input, and I realized that I didn’t read the article after I posted my request for explanation. I subsequently went back and read the article and still didn’t understand what they were trying to say. There are several posts I response to my request for explanation that did a better job of explaining than the article did. In particular the one by Trek made sense to me.
For clarification, I have investments outside of the fixed income market. I am a firm believer in diversification across asset classes. My comments were addressed only to my view on investments in the bond market.
>That is why I only buy direct obligations of the US Treasury.<
Some relaxing, reading material for you to enjoy with your lunch.
http://www.financialsense.com/editorials/fekete/2008/1205.html
But facts are facts. And gold is trading today about where it was in the 1980s where it peaked at around $800/ounce. Factor in storage costs and the long-term "gold bugs" have been destroyed.
But circumstances can change. And as bad as things appear today anything is possible. Perhaps sound money will re-appear some day.
I try to keep my investment decisions and my political views separate. But I always have an open mind. If I thought gold needed a larger role in my portfolio I would certainly add some.
But for me, the bond market is primarily a source of current income. And this is different than a store of value. In deflationary times gold is going nowhere. And, right now, I see massive capital destruction all around us.
JOMO
The article says that Muni bond funds run by Vanguard, Fidelity and T. Rowe Price have largely avoided the problem.
I have money in T. Rowe Price’s Virginia tax-free muni fund (PRVAX) and in the last 12 months, it’s down 4.95%. I also have money in Vanguard’s Long-Term Tax-Exempt Adm (VWLUX) fund. It’s down 4.7% over the last 12 months.
Both of these funds yield is in the 4.5% to 4.7% range, tax free, corresponding to 6% or so depending on your tax bracket.
I’m OK with both these funds being down 5% and wish that the rest of my investments had done so well.
Jack
Multiply this simple case by hundreds, if not thousands, of similar bond purchases -- and you can see how a municipal bond fund works.
Now suppose a rating agency reduces the bond rating for the municipal government in our example from AAA to A. Every $10,000 bond it has issued will immediately lose a portion of its "market value" (even though it still has the same "face value") because it was issued as a AAA-rated bond (i.e., it pays a lower rate of interest because the risk of default was very low at the time) but the government that backs the bond is now considered only an A-rated risk (i.e., the risk of default is higher).
This is why astute bond investors over the years (Michael Milken, for example) never invested in AAA-rated bonds. Their ratings have nowhere to go but down, while the interest they pay will always be based on the original AAA rating.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.