Fund man­ager tells shaken mu­nic­i­pal bond in­vestors what they should do next.

The Denver Post - - BUSINESS - By Cy­bele Weisser

The past year has meant a wild ride for in­vestors in mu­nic­i­pal bond funds. Be­tween Septem­ber 2015 and this past Oc­to­ber, mu­nic­i­pal bond funds had 54 straight weeks of in­flows, with in­vestors pour­ing some $68 bil­lion into them. Muni fund own­ers were re­warded hand­somely: In the first six months of 2016, the Black­Rock Strate­gic Mu­nic­i­pal Op­por­tu­ni­ties fund re­turned 4.7 per­cent, for ex­am­ple. The 10-year yield on the AP Mu­nic­i­pal Bond in­dex, which moves in­versely to bond prices, hit a low of 1.69 per­cent in July. Then the bear came out roar­ing. In early Oc­to­ber, the flow of dol­lars into muni funds stalled as bets in­creased that the Fed­eral Re­serve would raise in­ter­est rates late this year. Sell­ing ac­cel­er­ated af­ter Don­ald Trump’s vic­tory on ex­pec­ta­tions that his plans to boost eco­nomic growth would hurt the price of bonds. In Novem­ber alone, in­vestors yanked over $10 bil­lion from muni funds, ac­cord­ing to the In­vest­ment Com­pany In­sti­tute. Black­Rock’s Strate­gic Mu­nic­i­pal Op­por­tu­ni­ties fund fell 4.4 per­cent.

Peter Hayes, co-man­ager of the $4.7 bil­lion Black­Rock Strate­gic Mu­nic­i­pal Op­por­tu­ni­ties fund, re­cently talked about how in­vestors can best nav­i­gate the cur­rent un­cer­tain­ties. An­swers have been edited for length and clar­ity.

Q: Muni bonds have just un­der­gone an in­tense sell-off. Do you think it has gone too far? A: Well, ev­ery big sell-off winds up be­ing a good long-term buy­ing op­por­tu­nity, at some point. It’s a ques­tion of find­ing the right en­try point.

This sell-off has been so dra­matic that it cre­ated value in a short amount of time. Mu­nic­i­pal bonds are yield­ing more than Trea­surys right now, and last week we be­gan to see some sta­bi­liza­tion of the mar­ket.

But given the head­winds, I’m not sure we are com­pletely out of the woods yet.

Q: Which head­winds worry you the most?

A: In­ter­est rates con­tinue to be a con­cern. If rates go higher, that will scare in­vestors from long-term as­sets.

Q: With all the talk of tax re­form, some have won­dered if the mu­nic­i­pal tax ex­cep­tion could be at risk.

A: We em­phat­i­cally don’t be­lieve that we will lose the muni tax ex­emp­tion. Q: Sounds like taxes are a wild­card.

But it does seem likely that Pres­i­den­t­elect Trump will try to boost in­fra­struc­ture spend­ing. How do you think that will im­pact the muni mar­ket?

A: The ini­tial re­ac­tion to the in­fra­struc­ture pro­pos­als was that it would be neg­a­tive, be­cause it would mean more is­suance in the muni mar­ket.

But if you re­ally look at the Repub­li­can pro­pos­als, they’re talk­ing about an in­fra­struc­ture bank and pri­vate tax cred­its.

Q: So what’s the best strat­egy for in­vestors right now?

A: If you al­ready own mu­nis, don’t sell. If you need a bit of in­come and want to take a po­si­tion, shorter-term bonds look cheap. Be­cause the cor­rec­tion has been so large, those look­ing for more in­come might want to put a por­tion of their money in the 10- to 15-year part of the curve.

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