"The union controlled states of California, Illinois, New Jersey and New York are jeopardizing the U.S. economy by not taking the necessary steps to cut state costs. When funds like Vanguard cancel municipal bond funds, it's because they know by promoting a cruise on the Titanic they are inviting financial calamity on their own group. The contraction of the American economy will not end until the people of these states realize they are being controlled by socialist unions who have no concern for basic economic principles. This country will not survive economically if they are allowed to continue their massive spending programs coupled with decreasing state revenues. It just won't work."
Nicholas Contompasis
By Romy Varghese and Jane J. Kim
In the latest fallout from the municipal-bond rout, mutual-fund giant Vanguard Group on Thursday pulled plans for three funds dedicated to muni bonds, citing the extreme volatility in the market.
Vanguard on Thursday told regulators it was withdrawing its request to launch the index and exchange-traded funds.
"We believe that this delay is prudent given the high level of volatility in the municipal bond market," says spokeswoman Rebecca Katz. "This volatility could impede the funds' abilities to tightly track their respective benchmarks, deliver on the funds' objectives, and meet shareholders' expectations."
Muni bonds have been tumbling for weeks amid worries about growing debt burdens of state and municipalities, the likelihood of rising supply and an exodus of investors out of municipal bond funds. The outflows force the funds to sell more, creating a vicious cycle. ETFs have also felt the brunt of the decline and have become high-profile victims of the slide.
ETF shares trade on the stock exchange, making their moves easier to see. The iShares S&P National AMT-Free Municipal Bond ETF fell 6.7% in the three months ending Wednesday; the SPDR Nuveen Barclays Capital Municipal Bond ETF dropped 6.9%.
Vanguard first filed a request to launch the funds, which were to be based on Standard & Poor's municipal-bond indexes, in June 2010, although their launch was postponed several times.
The decision was a reflection of the difficulties of launching funds in a volatile market, rather than a reflection on munis themselves, Ms. Katz said.
"This is really just the difficulties of launching a new fund with a low level of assets in a volatile market that's experiencing outflows," she says. Vanguard currently manages $33.1 billion in six tax-exempt money-market funds and $85.3 billion in 13 tax-exempt bond funds.
On Thursday, the declines in muni debt continued for the seventh straight day, driving yields on some bonds to their highest level in two years. Yields rise as prices decline, indicating investors are demanding higher returns for the perceived higher risk.
"The market feels queasy," said Eaton Vance municipal bond portfolio manager Evan Rourke.
Yields on 30-year triple-A rated general obligation bonds shot higher to 5.01% on Thursday, according to Thomson Reuters Municipal Market Data. The last time those bonds yielded 5% was Jan. 30, 2009. The yield has risen from 4.68% on Jan. 3.
The yield on the 10-year bond jumped to 3.36% on Thursday, the highest since June 15, 2009.
Investors are concerned about big slabs of muni bonds being offered in the market and continued outflow of cash from muni bond funds. According to Lipper FMI, money has flowed out of municipal bond funds for nine consecutive weeks.
New offerings this week have had to offer higher yields to win over cautious investors.
The New Jersey Economic Development Authority on Thursday sold a 2024 tax-exempt bond with a 5.37% yield, 39 basis points higher than the yield offered on a similar maturity Tuesday, the first day the bonds were sold to individual investors. The agency also shrank the size of the sale from the original $1.2 billion to about $712 million because of the tough conditions.
Vanguard had planned to launch the Vanguard Short-Term Municipal Bond Index Fund, Vanguard Intermediate-Term Municipal Bond Index Fund, and Vanguard Long-Term Municipal Bond Index Fund, the firm said in the filing.
Write to Romy Varghese at romy.varghese@dowjones.com and Jane J. Kim at jane.kim@wsj.com
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