Cohen sees "train wreck" in muni bond market

NEW YORK (Reuters) – The U.S. municipal bond market is turning into “the biggest slow-motion train wreck I’ve ever seen,” Marilyn Cohen, president and CEO of Envision Capital Management, said on Wednesday.

“The only question is whether it’s taking a bullet train or a local – and it’s a local,” she said in an interview with Reuters.

Cohen is advising her clients to buy individual bonds selectively, shorten their durations, buy pre-refunded bonds that are escrowed only by U.S. Treasuries, to diversify and to take less yield today to keep opportunities open for tomorrow.

“The old-fashioned way of investing (long-term, hold-to-maturity) just won’t work anymore,” she said.

She added that a real test for the market will be in the next quarter, when bond supply, currently at an 11-year low, starts to pick up.

“Who will buy these bonds?” she asked, noting that retail investors are on the fence.

Cohen, who has written a book entitled “Surviving The Bond Bear Market: Bondland’s Nuclear Winter,” said muni investors are facing the prospect of a prolonged bear market, the likes of which they have never seen in their lifetimes.

“Worries about the ‘Big D’ (deflation) are out; worries about the Big I (inflation) are in,” she said, adding that retail investors will be ill-prepared to face the coming higher interest rates.

Muni bond funds will continue to see outflows, according to Cohen. She expects a wave of selling because investors think that “nothing has changed, nothing has gotten better.”

Well-publicized predictions of a default deluge and reports of lingering budget gaps are good for buyers because they have sparked governments to cut costs and attempt to create more fiscal responsibility, she said.

“It’s time to pay the piper,” she said. “But no one has suggested that muni bondholders take a haircut.”

For the next fiscal year, total state budget gaps are forecast at topping $100 billion. States are short at least $800 billion in covering benefits for retirees, with some forecasters saying those obligations could reach $3 trillion if their investments do not make healthy enough returns.

In the primary market on Wednesday, M.R. Beal & Co priced nearly $542 million of New York City Municipal Water Finance Authority revenue bonds with a top yield of 5.20 percent for bonds due in 2043 with a 5 percent coupon. That yield was 3 basis points higher than the top yield offered to retail investors during a presale period on Tuesday.

J.P. Morgan Securities won $360 million of Massachusetts general obligation bonds in competitive bidding with a top reoffered yield of 4.34 percent in 2029 and with a 5 percent coupon.

Tax-exempt muni prices ended Wednesday unchanged to lower, with yields on AAA-rated 10-year bonds up 2 basis points to 3.01 percent and 30-year yields steady at 4.7 percent on Municipal Market Data’s benchmark scale.

(Reporting by Chip Barnett, additional reporting by Karen Pierog in Chicago and Lisa Lambert in Washington; Editing by Dan Grebler)

Cohen sees "train wreck" in muni bond market