Some municipal bond buyers have snapped up basement bargains over the week as a high-yield fund unloaded large chunks of its portfolio at deep discounts.
The Easterly RocMuni High Income Municipal Bond Fund's total net assets dropped to $49.9 million as of Tuesday down from $232 million as of March 31, as the fund floated large bid lists to potential buyers across the market.
The NAV was at $6.36 at the start of the month, falling to $6.15 by Thursday and then tumbling downward to $3.10 on Tuesday. The fund's performance year-to-date is negative 54.08%.
Easterly said in a statement that it was not liquidating but "repositioning."
"The fund was repositioned to improve liquidity and continues to seek investment opportunities in line with the fund's investment mandate," said an Easterly spokesperson in an email.
The large selloff is a rare occurrence in the high-yield market, and the rock-bottom prices show the risks of a high-yield market where liquidity is famously limited, market participants said.
"Things have not gone so well for them, and the big reason is they own a ton of the most speculative deals that have come to market in the past couple of years," said a buyside source who asked to remain anonymous.
"There are lots of interesting opportunities and a lot of people looking at these lists," they said. "These are very, very dramatic markdowns from where they were marked."
Just under 84% of the portfolio is made up of credits rated D to BB-plus, according to its
Birch Creek Capital noted the selloff of the "unique credits" in a Monday note without naming the fund.
"Many of these bonds traded at massive discounts to their evals, underscoring the risk involved in investing in the most speculative projects," Birch Creek said. "While this portion of the market may unearth rare opportunities for outsized returns, we believe this is best left for firms that have deep expertise in distressed credits and complex workouts."
Some of the credits represent high-profile defaults and distress across the market:
On Friday, an investor paid two cents for $800,000 of the Alabama proton center bonds with a 6.85% coupon and 2047 maturity, according to Electronic Municipal Market Access. The most recent trade before that was in 2021, for 114.
A buyer on Monday bought $2.6 million of Purecycle bonds with a 7% coupon due in 2042 for 50 cents on the dollar. The bonds traded in February 2024 for 102.
A $3.2 million chunk of bonds issued for borrower Gladieux Metals Recycling LLC sold Monday for 4 cents. The paper carries a 9% coupon. It last traded for 102 in April 2023.
The Gladieux paper, which has been in default for years,
The credit information on many muni-financed project finance deals like Gladieux is hidden behind data rooms, accessible only to holders, so it's difficult to know what is happening with the credits. Recoveries on such projects are typically minimal.
The rock-bottom prices show the risks of the high-yield muni market, where liquidity is limited, said Chad Farrington, co-head of municipal bond strategy at DWS Asset Management. That's especially true for small pieces.
"If you have to sell, sometimes there's limited availability, even though the price could be right," Farrington said. "It's just whether somebody knows the name you know or not, and whether there's an ability or willingness to take on more of the credit."
Farrington said he hopes Easterly's selloff does not cause any contagion.
"When bonds are being sold at very depressed levels, if you also hold the bonds, you're going to feel the pain in that price move lower, and then hope it doesn't spread to the view of the market overall," he said.
Kathie O'Donnell contributed to this report.
