Saturday, January 15, 2011

Municipal Bonds Lose Ground Again

NEW YORK—Continued flows out of municipal-bond mutual funds and efforts to sell by fund firms helped send the $2.9 trillion municipal-bond market skidding again Friday.

The swoon marked the ninth consecutive session of declines and sent yields on 30-year triple-A bonds to 5.08%, up from 5.01% on Thursday. Prices and yields move inversely in bond markets.

Trading was slow and queasy. Spreads between offers to buy and sell widened—a sign of growing disagreement within the market over values.

Separately, a $1.3 billion tax-exempt bond deal to help finance one of the World Trade Center towers has been "temporarily shelved" due to volatile conditions in the municipal bond market, a person familiar with the matter said Friday.

The offering is expected to sell sometime during the next three months, the person said.

This is the second time choppy conditions in the muni bond market have led to a delay in the World Trade Center bond sale.

Thursday, Thomson Reuters unit Lipper FMI said municipal-bond mutual funds lost $1.5 billion in the week ended Jan. 12, marking the ninth straight week of outflows.

Several mutual-fund families put out sizeable "bid lists," or offers for sale, traders said. Those lists supposedly were for "short settle," meaning the funds are looking to raise cash quickly, presumably to meet redemption requests.

A $200 million list was put out by Vanguard Group, according to people familiar with the situation. It has been a seller over the last week, market participants said. Vanguard in a filing Thursday with the Securities and Exchange Commission withdrew a request to introduce three new muni-bond funds, a day before they were expected to be rolled out.

A Vanguard spokeswoman said the company maintains "sizable and ample liquidity reserves in our municipal bond funds" and is "confident that our liquidity positions are sufficient to meet shareholder redemptions, which to date, have been manageable."

There was little interest in sellers' offers, said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management. That leaves funds as well as dealers in the uncomfortable position of not being able to cut inventories as rapidly as they would like.

Municipal-bond mutual funds have been subject to huge redemptions, with $16.5 billion drained out by customers in the last nine weeks, according to Lipper. The funds tend to sell in the longer-term arena, helping to account for the largest declines taking place there.

On Friday, Federal Reserve Bank of Richmond President Jeffrey Lacker told reporters after a speech that he sees "some potential for broader distress" in the municipal bond market.

One portfolio manager observed that California 6% bonds of November 2039 were quoted at levels cheaper than similar-maturity dollar-denominated debt of Mexico and Colombia and that strong yield pickups could be made by switching out of foreign dollar-denominated sovereigns to bonds of the Golden State.

Write to Stan Rosenberg at

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