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BlackRock, Nuveen Unwind Leveraged Muni Trades Roiled by Havoc

BlackRock, Nuveen Unwind Leveraged Muni Trades Roiled by Havoc
By Martin Z Braun
Bloomberg
March 23, 2020, 1:47 PM EDT
* Mutual funds unwind $1.2 billion tender-option bond trusts
* Move contributes to flood of debt hitting the market

Large municipal-bond funds run by BlackRock Inc., Nuveen, Pacific
Investment Management Co. and Invesco Ltd. are unwinding a leveraged
investment strategy that backfired this month, contributing to the
flood of debt that’s been unloaded during a record-setting sell-off.

Last week, fund companies began liquidating about 75 so-called
tender-option bond trusts holding $1.2 billion worth of state and
local government debt, according to data compiled by Bloomberg. The
trusts issue floating-rate notes to money-market funds and use the
cash to buy higher-yielding long-term bonds. Mutual funds seek to
pocket the difference in yield between the two.

***

The leverage employed by mutual fund companies has amplified losses in
the closed- and open-end funds as rates climbed during the sell-off.

As of Friday, returns on 15 BlackRock closed-end muni funds that use
tender-option bonds and preferred shares as leverage have dropped more
than 20% this month and one, the BlackRock Maryland Municipal Bond
Trust, has lost 30%, according to data compiled by Bloomberg. Five of
Nuveen’s closed-end funds have lost more than 20% and one has lost
30.5%. Nuveen’s open-end High Yield Municipal Bond Fund, which also
employs tender-option bonds, has dropped 21.7% this month.

Invesco and Pimco’s muni closed-end fund share prices declined 15% to
25% this month.

Those drops are far bigger than the overall municipal market’s. The
Bloomberg Barclays index of investment grade munis has declined 10.3%
this month, the biggest drop since at least 1980, and high-yield
municipal bonds have fallen 19.1%.

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