The Handbook of Municipal Bonds

CHAPTER 36

Managing a High-Yield Municipal Fund

Wayne Godlin Managing Director Morgan Stanley Investment Management

 

Jim Phillips Executive Director Morgan Stanley Investment Management

 

Bill Black Executive Director Morgan Stanley Investment Management

 

Barnet Sherman Vice President Morgan Stanley Investment Management

 

Mark Paris Vice President Morgan Stanley Investment Management

 

Seth Horwitz Senior Associate Morgan Stanley Investment Management

 

 

 

The first high-yield municipal bond funds were offered to investors in the early 1980s. To maximize current yield to shareholders, these funds invested in a new and relatively unknown asset class of bonds that came to market without a rating from Standard and Poor’s or Moody’s. Lacking a credit or performance history, these bonds were perceived by most investors as having significant risk. But a few portfolio managers and analysts focusing on this promising asset class saw returns that offered value relative to that risk. Nonrated bonds offered borrowers access to capital in sectors previously limited or excluded from the municipal bond market. High-yield investors found additional value in these newly developing sectors or unique bond issuers as well as distressed credits. As this market evolved, new entrants and new borrowers caused anomalies in traditional value relationships to emerge, offering trading opportunities. Moreover, derivatives entered the lexicon of the municipal bond market, offering institutional investors sophisticated ...