Rout Drives Discounts on Muni-Bond Funds to Most in Five Years (Raiders Of The Last Taxpayers)

Public sector pension funds are out-of-control in numerous states like Illinois. This puts state and local municpal bonds under duress.

(Bloomberg) — The swift rise in interest-rates and growing leverage costs have pushed discounts on municipal-bond funds to their widest in almost five years.

The discount, or the difference between a closed-end fund’s share price and the underlying value of its assets, is 11.1 percent, according to Ryan Paylor, a portfolio manager at Thomas J. Herzfeld Advisors Inc. in Miami. Such funds have lost 7.3 percent this year, more than five times the loss in the broader municipal market, and investors will likely sell shares if prices bounce to offset capital gains tax liability, he said. That could delay any recovery.

“It has been ugly,” said Paylor.

Many closed-end funds use leverage, which boosts returns when prices rise and sharpens losses when they fall. Yields on 30-year municipals have climbed 0.23 percentage point since the beginning of the month, reducing the value of debt held by the funds. Meanwhile, leverage costs have continued to rise as the Federal Reserve increases short-term rates, shrinking the income generated by the funds.

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Of course, unfunded pensions and retiree healthcare is insane in states like Illinois,  New Jersey and Hawaii. And Connecticut.

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State debt service to revenues are highest in these same states.

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Of course, when states go past the point of no return, they will plead with Congress for a bailout.

Here are taxpayers in Illiinois trying to resist politicians giving uber-generous pensions to public workers.

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