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Leveraged Municipal Bond Funds Hit With Losses As Bond Market Falters

Posted on July 7th, 2022 at 3:27 PM
Leveraged Municipal Bond Funds Hit With Losses As Bond Market Falters

From the Desk of Jim Eccleston:

The recent bond rout has led to substantial losses for leveraged municipal bond funds. 

According to Morningstar Direct, high-net-worth clients may be regretting their investments in closed-end municipal mutual funds, which hold about $60 billion in total. In fact, nearly four million U.S. households invest in closed-end funds, according to data from the Investment Company Institute. Nearly half of investors in closed-end funds are retired with a median household income of $135,000. 

While investors are permitted to trade closed-end fund shares, clients are not able to add money to funds or redeem shares for cash as is possible with other open-end mutual funds. Closed-end funds often utilize leverage by borrowing an amount equivalent to about one-third of their value and subsequently investing it. Closed-end municipal mutual funds have lost 15.9% in the first five months of 2022, according to Morningstar Direct. 

The losses primarily can be attributed to recent fixed-income volatility after the Federal Reserve sought to slow inflation by increasing interest rates. In essence, short-term interest rates have drastically increased, which has reduced the amount of money closed-end funds can pay to investors after covering borrowing costs. On the other hand, decreasing bond prices have reduced the funds’ market values due to the existence of newer, higher-yielding debt instruments. 

ÍøÆØ³Ô¹Ï LLC represents investors and financial advisors nationwide in securities, employment, regulatory and disciplinary matters.

Tags: eccleston, eccleston law, bonds, bond market

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