Municipal bond investors will reap over $26 billion from Jan. 1 coupon payments and redemptions, but analysts and portfolio managers remain cautious about the prospects of the cash flowing back into the market any time sOOn.
According to MuniView, a Bond Buyer database, approximately $26.18 billion of bonds are expected to be redeemed on Jan. 1. This includes current and advance refunded issues, maturing bonds and short-term notes, and coupon payments.
That's slightly less than the approximately $28.9 billion that flowed into investors' hands last January.
In total, MuniView estimates that investors will see about $300.74 billion from redemptions next year, making it the largest year ever for municipal redemptions.
But with shell-shocked investors digging out from under one of the worst fixed-income markets in recent history, some money managers believe that many won't be ready to plunge back into the markets.
"It may take some time before we see individual investors come back into the bond market in mass," said Edward A. Taber 3d, executive vice president of Legg Mason Inc.
Tuber, who oversees Legg Mason's mutual fund operations, told reporters at a Legg Mason mutual fund conference in New York last week that he sees many similarities between the 1994 and 1987 bond markets.
During the first six months of 1987, interest rates soared and mutual funds saw huge redemptions. Meanwhile, liquidity dried up as dealers suffered huge losses on inventory and limited trading activity. As principal eroded, investors sought refuge in money market instruments, subjecting tax-exempt funds to massive redemptions.
The October stock market crash helped turn the tide, as investors fled to bonds.
Since the beginning of this year, The Bond Buyer's 20-bond general obligation index of yields has risen more than 180 basis points, while the yield on the 30-year Treasury bond has climbed about 190 basis points.
Through September, long-term municipal funds have seen about $3.1 billion of redemptions, according to the Investment Company Institute. That is only slightly less than the $3.2 billion of redemptions for 1993 as a whole. And dealers say finds have continued to see strong outflows in both October and November.
"People were traumatized [in 1987] and it took a long time for people to let go and develop the confidence to come back into the market," Taber said.
Instead, investors may continue to seek Shelter in cash or in cash equivalents such as money market funds. "They may stay too conservative," Taber cautioned.
Some investors have also put some money into the stock market, a trend that could continue, according to Susan Keenan, a senior vice president with Alliance Capital Management.
Traditional savers who moved cash into municipals from bank certificates of deposit during the bull market may initially shun tax-exempts next year, Keenan said. But eventually investors who need tax-exempt income will return, she added.
"I don't see this as any different than what we saw in 1987. There's blood in the streets now ... but there's some smart money coming back in," Keenan said.
But some analysts still expect the municipal market to rally in January as supply dwindles and redemption cash flows in, producing a traditional "January effect."
While rising interest rates hurt demand for mutual funds, they enhance demand for direct bond purchases, said George D. Friedlander, a managing director of fixed-income high net worth for Smith Barney.
"We're seeing huge demand from direct retail. We're seeing record days," said Friedlander.
Jan. 1 will also clear the slate on dealers' trading losses from this year. In addition, investor tax-loss selling will cease and people may turn their attention toward purchasing bonds, Friedlander added.
"When you focus someone's attention on the losses they've taken, it's not conducive to new purchases," said Evan Lamp, a vice president and senior municipal strategist at Merrill Lynch & Co.
Although many investors are in the throes of tax-loss selling, as interest rates stabilize and investors begin to see positive total returns on their mutual funds, they should return to the market, Lamp said.
Bruce P. Bedford, chairman and chief executive officer of Flagship Financial in Dayton, Ohio, says investors wary of further Federal Reserve tightening in 1995 will invest at the short-end of the yield curve.
"To the extent that [money] will go back into the municipal market, the people who worry a lot are going to try and shorten up," said Bedford, whose firm manages about $4.5 billion in tax-exempt assets. These investors will be seeking money market funds and mutual funds with an approximately five to six year average life, he said,
But "they're not going to flee the market," he added.
