Jan. 10, 2003 — As equities plunged, an increasing number of weary investors reallocated their money into safe haven vehicles, which included municipal bonds. All municipal bond funds tracked by Standard & Poor’s posted gains in 2002, with the average portfolio rising an impressive 8.0%.
Portfolios with longer-term maturities in our universe did better than their shorter-term counterparts, as rates declined further in 2002.
Investors found municipal bonds have at least three excellent qualities going for them: a very low default rate; high credit quality — about 50% of the muni market is AAA-rated — and yields comparable to or better than those of U.S. Treasuries.
For the first 11 months of 2002, muni bond funds received about $15.8 billion in net new cash, versus $11.6 billion for all of 2001, according to data from the Investment Company Institute. In 1999 and 2000, muni bond funds were bleeding, with outflows of $12 billion and $14 billion, respectively.
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Gregory Serbe, president of Lebenthal Asset Management, points out that 2002 was an “unprecedented” year for municipal bonds, particularly for the huge size of new issues. “In 2002, we saw something like $357.1 billion of new muni bonds come into the market,” he noted. “The previous record was about $292.2 billion in 1993.”
Serbe cautioned that in 2003, one of the major factors that may negatively impact muni bonds are the prickly budget problems faced by state and local governments, and a probable rise in interest rates.
“I think there will still be a lot of new supply issued in 2003, as municipalities want to take advantage of low interest rates and complete their projects and stimulate economic activity,” he noted. “But I don’t think the volume will be as high as we saw last year.”
Serbe is portfolio manager of the Lebenthal Taxable Municipal Bond Fund, the only portfolio that invests in taxable muni bonds. The fund gained 14.5% in 2002, but doesn’t appear on the table below since it is classified as a high-quality corporate bond fund. However, it was the best-performing fund in its category.