Corporate America Selling Munis Even As Consumers Buy

Even as consumers have purchased a record amount of municipal bonds in 2009, many corporations are selling their portfolio to take advantage of rising values and concerns about municipal finances.

Consumer investments in municipal bonds funds hit a record $2 billion September and October. At the same time, companies are seeing the recent rise in muni bond prices as an opportunity to sell parts of their portfolio.

From Bloomberg:

Increasing prices on tax-exempt debt “gave us the opportunity to reallocate into other, taxable bonds,” said Richard Scott, chief investment officer at Loews Corp., which owns about 90 percent of business-insurer CNA Financial Corp. and whose chief executive officer, Jim Tisch, is co-founder Laurence Tisch’s son.

The New York-based company sold $1.2 billion of the $8.7 billion in municipals it held as of Dec. 30, 2008, according to Scott.

At the same time, some investors are concerned about local government finances:

“We’ve just begun to reduce our exposure to municipals because we are uncomfortable with some of the fiscal practices of some of the government entities,” Thomas Wilson, Allstate’s chief executive officer, said in an interview. The Northbrook, Illinois-based insurer reduced municipal holdings 8.3 percent to $22.1 billion in the third quarter.

Public officials “haven’t adjusted their spending, so they are running deficits,” said Wilson. “When we look at the risk- return profile we don’t think we are being paid enough to take that risk today.”

Still concerns about muncipal finances seem a bit overblown for most munis. General obligation municipal bonds are backed by the tax revenue of the issuing municipality. Corporate bonds are 90x more likely to default than their municipal bond cousins. Still, in times of local government financial stress, it makes to be sure investors are purchasing bonds or bond funds that are not investing money in very distressed governments with declining revenue bases and large foresclosures - like Las Vegas, parts of California, Detroit, etc.

 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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