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NEW YORK, Aug 9 (Reuters) - The asset value of municipal bond closed-end funds has fallen over the last two months and could be set to drop further as interest rates rise, according to a report by Fitch Ratings released on Friday.
The 188 closed end funds that specialize in municipal bonds saw their net asset values fall more than 12 percent over May and July, with the heaviest losses concentrated in longer-dated funds, Fitch said.
"Further short-term losses are probable as the Fed continues to reverse its monetary easing policies," Fitch said.
Fitch said its sensitivity analysis shows a 1 percent parallel rise in interest rates would lead to an immediate 16 percent decline in asset value for funds that have portfolio durations of more than 10 years, which is more than 71 percent of funds in the sector.
However, Fitch said falling bond prices also represent a reinvestment opportunity for fund mangers.
"Conservatively positioned managers are able to successfully capitalize on price dislocations by purchasing quality bonds that, in their view, became much more attractively priced," Fitch said.
Fitch added that "any short-term decline in NAVs for the sector due to rising rates should be partially offset over time by the ability to reinvest at higher yields."
The yield on 10-year U.S. Treasury note surged to 2.5 percent toward the end of June 2013 from 1.5 percent on May 1, Fitch notes.