Muni Exodus Confirmed As Investors Pull Money From Affected Funds
After a weeklong smackdown in muni securities of all kinds, both cash and synthetic (read CDO-like ETF time bombs), today for the first time we have seen confirmation that investors are starting to say enough. Reuters reports that for the first time since April 14, mutual fund investors withdrew a net $115 million from tax-exempt funds last week. "Funds are the largest players in the municipal market so to the extent there are outflows, that will put more upward pressure on rates[downward pressure on prices]? said Jack Bauer, managing director of fixed income at Manning & Napier, a money manager in Fairport, New York, who oversees $25 billion in assets. "It's been kind of ugly this week." See Jack Bauer is all confused - one would have though that 28 consecutive outflows from domestic stock funds may have put in just a little "downward pressure" on stocks. Wrong and wrong - in fact stocks have proven that they levitate best on fraud, mark-to-krazy klowns, and scammery precisely when redemptions and Fed-Citadel involvement is highest. Which is why we expect that once there is no money left in stock funds (a few weeks at this rate) and in muni funds soon, muni will actually surge to never before seen highs as the bizarro effect appears in full force, and whatever muni ETFs are out there will do an SRS circa November 2008.
Thought maybe he surge won't begin just yet. Here is some more on what the rout is doing to ETFs via Reuters:
The recent shift out of munis also hit exchange-traded funds this week. Volume has soared, spreads have widened and prices fell even more quickly than the drop in prices of the underlying bonds.
On Wednesday, for example, investors traded 1.3 million shares of the iShares S&P National AMT-Free Muni Bond ETF -- almost 10 times its average daily volume over the prior three months.
The fund's share price dropped to a low of $99.05 on Tuesday from over $105 on Nov. 9. It partially recovered to $100.52 in afternoon trading on the New York Stock Exchange on Thursday.
The ETF's price decline happened far more quickly than the drop in the prices of the bonds it owns, although the gap has narrowed during the week.
At the close on Nov. 10, the ETF was priced at a discount of about 0.61 percent to the net asset value of its portfolio. The discount widened to as much as 3 percent in midday trading on Monday and Tuesday, but has since narrowed to 0.71 percent at the close on Wednesday.
The gap narrowed largely because the bonds' value eventually declined close to the share price of the ETF.
Such gaps can crop up when ETFs own assets like municipal bonds that are less liquid, essentially more difficult to trade, than the funds themselves, explained Jerry Paul, chief investment officer of Essential Investment Partners in Denver.
"With some ETFs, we just think the asset is better suited to active management," he said.
Pressure on municipal prices has hurt shares of Eaton Vance Corp <EV.N>, a Boston-based money manager and a leading tax-exempt fund manager, one analyst who follows the company said.
Shares of Eaton Vance dropped from $31 to as low as $29.11 from Monday through Thursday's open. The shares rebounded on Thursday along with a slight rebound in municipal bond prices. The shares were at $29.74 in afternoon trading on the New York Stock Exchange.
And here is a video that explains everything for those who are still confused why QE3 better be a-comin' soon.