Bloomberg News

Pimco Joining Sellers Spurs Steepest Monthly Losses: Muni Credit

June 13, 2013

PIMCO Co-Founder Bill Gross

Pacific Investment Management Co. co-founder Bill Gross cut his local-debt allocation by one percentage point to 4 percent in May, the lowest since July, in the $285 billion Total Return Fund. Photographer: Scott Eells/Bloomberg

The $3.7 trillion municipal market is poised for its first two-month slide since 2011 as Bill Gross, manager of the world’s biggest bond fund, is joining individual investors in reducing holdings of local debt.

Tax-free securities have lost 1.5 percent this month after a 1.3 percent drop in May, and are underperforming Treasuries by the most since December, Bank of America Merrill Lynch data show. Amid speculation that the Federal Reserve will scale back its bond buying, benchmark 10-year muni yields are the highest since March 2012.

Individuals, who own about 70 percent of munis directly or through funds, have led the exodus, pulling out the most money this year. Gross, co-founder of Pacific Investment Management Co., cut his local-debt allocation by one percentage point to 4 percent in May, the lowest since July, in the $285 billion (PTTRX:US) Total Return Fund. The Newport Beach, California-based company released the data on its website.

“When you’re managing a huge portfolio like that and you’re trying to manage specifically against downside risks in the market, then it’s reasonable that you would lighten up a bit on munis,” said Matt Fabian, managing director of Concord, Massachusetts-based research firm Municipal Market Advisors.

Cash Buffer

The municipal market is losing value even as investors are set to receive $128 billion of principal and interest payments in June, July and August, $16 billion more than last year, according to Bank of America.

If history is any guide, this time of year is an attractive period to buy local debt. Yields on 10-year munis have declined 8.3 percent on average in July in the past four years, trailing only April’s average drop of 9 percent, data compiled by Bloomberg show.

Still, investors pulled $1.6 billion from U.S. muni mutual funds in the past week, the most this year, Lipper US Fund Flows data show.

Mark Porterfield, a spokesman for Gross, said in an e-mail that the company doesn’t comment on its holdings. Gross also reduced Treasuries to 37 percent of the fund’s assets in May from 39 percent, even as he says the Fed isn’t about to raise interest rates.

Gross’s Post

“Fed’s not raising interest rates for years,” Gross posted on Twitter June 12. “That makes intermediate Treasuries a buy at 2.0 percent+.”

The decreased allocation to munis in the Total Return Fund may influence the broader market because of the fund’s size and the limited trading in local debt, said Gary Pollack, managing director with Deutsche Bank AG’s private-wealth unit in New York.

“The bid side of the muni market is not as deep and broad as other fixed-income sectors,” said Pollack, who oversees about $6 billion of munis. “So selling pressure in the magnitude of billions will have a negative impact on munis.”

Yields on 10-year benchmark local debt have jumped by about 0.7 percentage point since early May, to 2.36 (BVMB10Y) percent.

Even as investors are set to receive the three-month wave of redemption funds, they are still waiting for yields to climb higher before buying tax-exempt bonds, Fabian said.

Loss Leader

“They got the cash, but they also saw losses,” Fabian said. Some are also being drawn away by stocks after the Standard & Poor’s 500 index set a record high last month, he said.

Once yields on benchmark tax-exempt debt maturing in 10 years reach 2.4 percent to 2.5 percent, demand will increase, Fabian said. Pollack estimates a range of 2.5 percent to 3 percent will attract individuals.

Such investors have money to purchase munis as they have been putting their assets in cash and short-term investments, analysts led by George Friedlander, chief muni strategist at Citigroup Inc. in New York, wrote in a June 12 report.

The increase in yields “has already gone far enough to make some yield levels attractive relative to risk,” the analysts wrote.

In 30-year maturities this week, muni yields exceeded those on similar-maturity Treasuries by the most in more than a month.

Benchmark 30-year munis yield 3.53 percent, compared with about 3.32 percent for federal debt. The ratio of the two yields, a measure of relative value, is about 106 percent, the highest since April. The higher the figure, the cheaper munis are relative to Treasuries.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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