NEW YORK (Reuters) - High-yield U.S. municipal bond funds, which saw runaway returns for most of this year, could spiral downward in 2015 if investors become spooked anew by negative headlines out of Puerto Rico, a senior portfolio advisor at Eaton Vance said on Tuesday.
“I’m very concerned about the high yield muni area because of the dependence on cash flows,” Tom Metzold, of Eaton Vance, said at the Reuters Global Investment Outlook Summit in New York.
A high-yield blip this year illustrates how easily investors can be spooked by negative headlines from Puerto Rico, which has population outflows and a stagnant economy. The island and its authorities have over $70 billion of outstanding muni debt.
Investors have pulled money from high-yield muni funds in only three weeks this year. The biggest outflows came in July, when $691 million left after Puerto Rico passed a law giving its government-controlled corporations the ability to restructure their debt.
Otherwise, most high-yield funds, like the rest of the muni market, have had a banner year after taking a beating in 2013. Eaton Vance’s High Yield Municipal Income Fund (ETHYX.O) is up more than 16 percent year-to-date.
Overall, 115 high-yield muni funds have about $48 billion in assets, up from about $34 billion at the start of the year, according to data from Lipper, a Thomson Reuters unit. The growth leaves them at risk of falling on any bad news, even if funds don’t contain any Puerto Rico debt, Metzold said.
“When (net asset values) fall, people panic. When people panic, they sell. When they sell, that causes more redemptions. When more redemptions cause more distressed selling, that causes more decline, and the snowball keeps rolling downhill,” he said.
Metzold said that U.S. cities and states are likely to remain fiscally conservative next year and keep levels of new bond issuance low.
The mismatch of supply and demand has driven up prices this year in the $3.7 trillion muni market. Metzold said he would surprised if more than $300 billion of bonds come to market next year.
That would be a slight increase over the expected $285 billion this year, but still lower than previous years. The yearly average since 2004 has been about $327 billion, according to Thomson Reuters estimates.
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Reporting by Hilary Russ and Megan Davies; Editing by Leslie Adler