US - Pacific Investment Management Co. and Cutwater Asset Management Corp. are advising investors that record fund withdrawals amid projections of widespread municipal defaults have created a buying opportunity.
Yields on top-rated tax-exempts maturing in 10 years have jumped about 105 basis points, or 1.05 percentage points, since October 1, according to a Bloomberg Valuation index. Tax-exempt debt posted a negative return for the fifth-straight month in January, the longest slump since a six-month slide in 1999, according to the Bank of America Merrill Lynch Municipal Master Index, which accounts for price changes and interest income.
"There's been creeping risk, but there's tremendous opportunity," said Clifford Corso, chief executive officer of Armonk, New York-based Cutwater Asset Management, said in an interview at Bloomberg headquarters in New York. Cutwater oversees $5bn in munis.
Top-rated tax-exempts due in 30 years are yielding 103% of comparable U.S. Treasuries, according to data compiled by Bloomberg. The ratio means investors can get higher yields plus tax-sheltered income.
The municipal market has "swung too far into default panic," Christian Stracke and Joseph Narens, PIMCO strategists, wrote in a report yesterday. "We at PIMCO believe that selective municipals now offer some of the most compelling value in credit markets."
Manageable levels of debt, low interest-rate costs, and the long-term nature of state debt are some of the reasons for Pimco's bullish position, the report said.
Meredith Whitney, the banking analyst and chief executive officer of Meredith Whitney Advisory Group, speaking December 19 on CBS Corp.'s "60 Minutes," predicted that states' fiscal stress would spark a "spate" of defaults among municipalities amounting to "hundreds of billions of dollars."
"The real level of defaults that the muni market will experience will be well below what the market currently implies, not to mention some of the more extreme predictions of hundreds of billions of dollars worth of muni defaults," PIMCO, the world's biggest manager of bond funds, wrote in a report yesterday.
Investors last week withdrew $1.1bn from US municipal-bond mutual funds, the 12th-straight outflow, Lipper US Fund Flows said February 3. About $23.6bn has been redeemed since the week ended Nov. 17, including a record $4bn in the week ended January 19, the most since Lipper started compiling data in 1992.
"You have a market that's 70% retail," Corso said. Whitney's comments "created a bit of a tipping point on fear," he said.
The iShares Standard & Poor's National AMT-Free Bond Fund, an exchange-traded fund that tracks the S&P municipal-bond index, touched $95.85 January 14, a 4% decline from the month's highest point January 4 and the lowest since December 17, 2008. The fund closed at $98.52 yesterday.
By contrast, the S&P 500 Index has climbed 11.8% since November 1, reaching 1,324.6 yesterday, the highest since June 19, 2008.
"It wouldn't surprise me if two years down the road general obligations weren't the highest performing," Corso said. "We're expecting price appreciation, but it'll be a bumpy ride."
Pimco, a unit of Munich-based insurer Allianz SE, managed $1.24trn of assets as of Sept. 30.
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