Munis Continue Their Nosedive as Bill Gross Buys

Dec.15.10 | About: iShares National (MUB)

When Bill Gross declared a top in the bond market, MUB, the iShares S&P National Municipal Bond ETF, was still riding high between $105 and $106. Almost three weeks later, MUB cratered to 16-month lows, loudly declaring that the gravy train in munis had likely ended. Over the course of the past month, MUB experienced a weak rally before resuming its sell-off. MUB is now trading at $97.30, 9% down from its 52-week highs just four months ago.

The following weekly chart puts the recent declines in perspective. MUB is now at levels last seen at the lows almost two years ago in January, 2009. The last time MUB plunged this steeply was during the financial meltdown in 2008. It quickly rebounded from there.

Munis continue to plunge

Munis continue to plunge

*Chart created using TeleChart

This carnage is enough to awaken the bargain shopper in me.

So imagine my interest when I discovered that Bill Gross was already two steps ahead of me. The Financial Times reported that Gross stepped into the bond market with his personal funds to scoop up some fallen angels in munis:

“The opportunity created by falling prices for tax-exempt debt has tempted Bill Gross to invest $4.4m of his own money in five municipal bond funds run by his firm, Pacific Investment Management Co

Mr. Gross, a founder of Pimco and manager of the world’s largest bond fund, made the investments between the 8th and 10th of December, according to Securities and Exchange Commission filings, taking his total investment in the funds to $8.9m.”

The distance from a top to a buying opportunity sure is a swift one. Assuming it will take a collapse of at least similar magnitude to the one in 2008 to drive munis much lower, I have to assume the upside potential makes the risk of further downside worthwhile here. I hope to start buying at something close to Tuesday’s prices in Wednesday’s trading.

Note well that I am initiating these purchases only as part of an overall approach to diversification (I have treated munis like poison up until now). However, if MUB experiences a large enough relief rally from here, say 5-6%, I will most likely sell my holdings.

Be careful out there.

Disclosure: No positions