NEW YORK -- Some high-yield municipal bond funds that soared when credit concerns were tame now are turning in some of their worst performances in years, sparking fears they might send low-rated debt prices even lower if investors don't stop withdrawing cash.
Three Oppenheimer national municipal funds lost from 9.32 percent to 9.55 percent from May 1 to Aug. 21, according to an analysis of total returns by Lipper Inc, a unit of Reuters Group Plc. Yet these billion-dollar funds were industry leaders for the past five years, scoring among the top five.
An Oppenheimer spokeswoman said managers were not available. "Investments in the Oppenheimer Rochester municipal bond funds should be considered longer-term investments," Oppenheimer said on its Web site, www.oppenheimerfunds.com, in a statement explaining why the net asset values had fallen.
The company is far from alone in seeing its once-stellar performance get socked by the subprime mortgage storm that has turned investors from yield-hunters to safety-seekers.
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Newport Beach, California-based PIMCO's four high-yield muni funds have lost 7.66 percent to 7.98 percent, according to the Lipper data. BlackRock, located in New York, has three funds that have shed 6.9 percent to 7.2 percent.
Four of Jersey City, New Jersey-based Lord Abbett funds have shed 6.95 percent to 7.15 percent while one fund of Boston-based Eaton Vance has lost 7.07 percent.
These funds often invested in a variety of speculative municipal bonds. The list includes tobacco bonds, backed by the billions of dollars cigarette-makers agreed to pay states, debt sold by hospitals and retirement homes, and gas bonds, which utilities use to prepay purchases of natural gas.
A spokesman for the only fund to comment, Lord Abbett, stressed the funds' income. "The fund is managed primarily for long-term investors interested in attaining a high-level of tax-free income," said Jason Farago.
Just how long fund investors might stick it out before extracting their cash is a big unknown. Last week was already the sixth week in a row that high-yield muni funds were hit by withdrawals, according to AMG Data Services.
What choices investors make could depend partly on how these funds were marketed, fund experts said. But even if buyers were warned of the risks, several funds got such a lot of new money in just the last few years that this could be the first downturn many of their investors have ever seen.
High-yield munis were among the $2.4 trillion tax-free market's brightest stars in the past few years. But now the experts, who declined to be named because they did not wish to criticize the funds, fear they could become black holes.
"I don't want to see a crash that would be fomented by large systemic withdrawals from high-yield funds," one of the experts said.
Scott Berry, a Rochester, Michigan-based fund analyst with Morningstar, which is headquartered in Chicago, said: "Redemptions can be a big concern in high-yield funds because they tend to own nonrated issues that can be less liquid."
The harder a bond is to sell, the more likely its owner might have to accept a lower price, he noted.
High-yield fund managers might have to choose between selling their high-quality debt because its price has held up or unloading their lower-rated debt, though they risk hurting the prices on this category of bonds even more.
"That's the million-dollar question," Berry said, as the high-yield outlook may hinge on which choice they make.
New Jersey's $3.6 billion tobacco bonds exemplify the sector's drop. The 2041 maturity now is priced at 82 cents per dollar versus 99.75 cents when it sold in January, an expert said.
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