| BOSTON, June 26
BOSTON, June 26 The municipal bond market's
correction in June, one of the steepest drops in a decade, has
led to an easy decision for investors this summer: buy munis.
After investors pulled $5.4 billion from municipal bond
funds in the past four weeks, fearing a slowdown in the Federal
Reserve's bond-buying program, some investment advisers say
prices have likely bottomed out. That has set the stage for
bargain hunting in the summer, a time when good deals usually
are hard to find.
"The buffet is full and you can be pretty aggressive with
dealers on price," said Michelle Knight, chief economist at
Boston-based Silver Bridge Advisors, which oversees about $600
million in municipal bonds. "Normally, at this time of year, you
have to hold your nose."
The U.S. municipal bond market has a large base of retail
investors, especially wealthy individuals who buy tax-exempt
bonds to offset some of their income tax liability.
At face value, a New York muni bond with a 5 percent coupon
is throwing off a tax-equivalent yield of 10.1 percent for a
Manhattan resident paying the top rate for federal, state and
local taxes, research firm Municipal Market Advisors noted in
In the four days after Fed Chairman Ben Bernanke last week
said that U.S. growth was strong enough to slow bond purchases
later this year, five-year, 10-year, and 30-year municipal
yields spiked 43, 56, and 60 basis points, respectively. On
Tuesday, yields on top-quality 30-year bonds were unchanged at
4.13 percent, while the 10-year yields were up one basis point
to 2.81 percent.
Yields move inversely to prices.
"We've definitely brought in a new universe of investors
with these higher interest rates," said Tim McGregor, director
of municipal fixed income at Northern Trust Corp.
While many muni investors have been battered and bruised
this month, there's an army of individuals sitting on huge
stockpiles of cash, according to financial advisers.
There is an estimated $10 trillion in cash and near-cash
equivalents in the private sector, according to mutual fund
company Eaton Vance Corp.
Eaton Vance in its June commentary said it expected "to
continue to see some of this capital flow to munis," adding that
the muni market "is also offering a more compelling entry point
for those investors who have been patient reinvesting proceeds
from (municipal bond) calls, coupons and maturities."
Yields surged as muni bonds recently experienced a 20-day
price decline of 6.84 percent, the second-worst such loss since
2001, according to Municipal Market Advisors Inc.
For those investors already in the market, grinding out
rock-bottom yields, reaction to falling prices was swift.
They yanked $2.2 billion from U.S. municipal bond funds
during the week ended June 19, an acceleration from outflows of
$1.6 billion in the previous week, according to data released by
Lipper Inc, a Thomson Reuters unit.
The Invesco High Yield Municipal Fund alone had
$302 million in outflows during the most recent one-month
period. A number of high yield muni bond funds experienced
double-digit declines, led by the $380 million Nuveen California
High Yield Municipal Bond Fund's one-month plunge of 10.53
percent, according to Lipper data.
"I think people were caught off guard," said Lawrence
Glazer, a managing partner at Mayflower Advisors LLC. "There was
a high level of complacency going into the Federal Reserve
Using a standard benchmark measure of comparing the yield of
municipal bonds to yields of U.S. treasury bonds, many advisers
see plenty of value. Municipal bond yields, for example, on
five-year, 10-year and 30-year bonds are 110 percent, 111
percent and 116 percent over respective Treasury bond yields.
"Munis are attractive unless you see another surge in
interest rates," Knight, of Silver Bridge Advisors, said. "I
don't think the economy would justify another big move."
Robert Lutts, chief investment officer of Cabot Investment
Advisers, said there are real indications, though, that a U.S.
economic expansion - a catalyst for higher bond yields - could
be under way. He cited the strong data on durable goods orders
and auto sales.
Still, he described a sizable opportunity for municipal bond
"Savvy investors will take advantage," Lutts said.