High yield municipal bond funds are now the number two mutual fund category over the past year, with stocks down and investors scrambling for income.
Their bonds are less junky than their corporate counterparts, says David Hammer, comanager of Pimco High Yield Municipal Bond PYMDX, since muni issuers rarely default. Hammer and comanager Joe Deane take their cue from a committee that sets the ‘big picture’ strategy for all of Pimco’s funds. This is where it starts getting very intriguing, right, right? The funds mainly own low grade tax free debt issued by states and municipalities. The pair consequently turn to a team of 17 analysts, who assign grades to every of the bonds they research. The fund’s recent results were boosted by a ‘bigpicture’ decision to avoid bonds from economically troubled Puerto Rico and the analystdriven call to allocate a hefty slug of assets to tobacco bonds debt backed by revenue from a 1998 pact between states and cigarette makers.
Hammer and Deane have become more defensive in reaction to a market they think has become overvalued. Further, such diversified municipal funds are not always tax free as not all municipal bonds qualify for ‘tax free’ status. I live in CA and have the junk free Nuveen CA muni with a 2percentage yield this year which is tax free in CA. The fund sports a current yield of 0, equivalent to 3percentage for a taxpayer in the highest federal income tax bracket. They’ve also added moreliquid, easiertotrade IOUs to take advantage of the greater volatility they expect in the junk muni market.
Further, don’t actually ought to go into high yield municipal bonds to get a decent interest rate. They’ve boosted the average quality of the fund’s holdings to triple B minus, the lowest investmentgrade rating.