Some investors begin to cool to hottest U.S. muni bonds

jueves 26 de mayo de 2016 11:06 GYT

By Hilary Russ

NEW YORK May 26 (Reuters) - For more than eight months, investors have poured money into the riskiest U.S. municipal bonds, boosting prices as they dive into anything that can give them fatter yields in a global low-rate environment.

But increasingly, some portfolio managers and analysts are raising concerns about high-yield muni. They are waving red flags about its most notorious borrower, Puerto Rico, but also its best-performing sector, tobacco, and other potentially troublesome areas.

The space should be navigated with "extreme caution," said Citigroup muni strategist Jack Muller.

The sector has ring fenced its most troubled issuers, and investors could be penalized if they get stuck holding bonds that slip into that roped-off territory.

At the start of last year, market sentiment priced about $74 billion of munis in that distressed category, based on Citi's analysis. By this January, the figure doubled to about $150 billion, Muller said.

"You don't want to be part of anything when it does make that transition into the market consensus of distressed," Muller said.

Money has flowed to high-yield muni funds for 33 straight weeks, with nearly $5 billion of inflows so far this year alone. It was the best first quarter for high-yield fund flows in nine years, according to data from Lipper, a Thomson Reuters unit.

Investors are chasing returns. The S&P Municipal Bond High Yield Index has notched 4.02 percent of positive returns this year. Within the sector, a strong performance from tobacco bonds, with returns of 9.05 percent, has offset Puerto Rico's weaker 0.95 percent returns, according to S&P indices.   Continuación...