NEW YORK -- States and municipalities across the Unite States are facing mounting budget difficulties this year. But at least, in most cases, they are having no trouble financing their deficits. The demand for tax-free municipal bonds is up substantially.
"April was one of our very best months since January 1990, in terms of asset gains for state tax-free municipal bond funds," says Heidi Baxter, marketing manager for the tax-free funds of XTC Fidelity Investments in Boston. The funds are benefiting, she says, from a "combination of higher taxes, declining interest rates -- which makes existing bonds more valuable -- diversification and the possibility of tax benefits."
"We're getting a lot of very happy [muni-bond] shareholders these days," says Thomas Moles, a managing director for J. & W. Seligman & Co., an investment management firm. Despite recent problems regarding municipal bonds in jurisdictions such as Colorado, California and Philadelphia, municipal bonds continue to attract investors.
Because of the problems, Mr. Moles notes, both individuals and portfolio managers of municipal bond funds are engaged in "a flight to quality" -- they are looking for bonds given better gradings by thebond-rating services. Mr. Moles, with more than $1.4 billion in tax-exempt securities under his management, is senior portfolio manager of both Seligman Select Municipal Fund and Seligman Tax-Exempt Fund Series.
Experts note that the Tax Reform Act of 1986 left municipal bonds as one of the few remaining tax shelters for individuals. In 1984, the number of new tax-exempt issues slightly exceeded the $100 billion level for the first time. Throughout the late 1980s and into 1990, the value of new issues hovered between $110 billion and $115 billion annually.
According to John Collins, a spokesman for the Investment Company Institute, a Washington-based trade group, the net asset value of municipal bond mutual funds has burgeoned in recent months.
The total assets of national long-term municipal bond funds, with
portfolios of bonds from many political jurisdictions, were $73.3 billion at the end of March, compared with $65.3 billion at the end of March 1990. Assets of single-state long-term bond funds stood at $52.4 billion in March, compared with $42.7 billion a year earlier. And assets of short-term municipal bond funds were $90.3 billion at the end of March, compared with $77.1 billion a year earlier.