Closed-end funds that invest in municipal bonds declined as California sold $10 billion of short-term notes at yields higher than the state anticipated.
Falling prices for municipal debt as supply overwhelmed demand eroded the value of the assets held by the closed-end funds, mutual funds with a fixed number of shares that trade on an exchange. Many closed-end municipal funds use leverage, which amplifies their gains when bond prices are rising and deepens losses when bond prices decline.
The Nuveen Municipal Closed-End Index fell 1 percent, its first decline in three days. The index tumbled 10 percent from Nov. 5 through Nov. 15 as U.S. states and cities prepared to borrow a record $16.2 billion this week. As bond prices fell, yields on top-rated 10-year municipal climbed to 3.07 percent yesterday, the highest since June, from 2.69 percent on Nov. 8.
California sold $2.25 billion of debt due in May at a yield of 1.5 percent, up from 1.25 percent quoted to investors yesterday, Treasurer Bill Lockyer said. The state sold $7.75 billion of notes due in June at 1.75 percent, up 0.25 percentage point from yesterday, he said.
California municipal bond funds suffered some of the biggest declines. Eaton Vance California Municipal Bond Fund fell 3.7 percent to $11.10. Pimco California Municipal Income Fund II slid 3.4 percent to $8.38. Both funds use leverage, according to Morningstar Inc.
Among the largest closed-end municipal bond funds, Nuveen Insured Municipal Opportunity Fund fell 1.5 percent to $13.35. Invesco Van Kampen Trust for Investment Grade Municipals declined 0.7 percent to $13.74. Both funds use leverage.
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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