Pacific Investment Management Co's New York Municipal Bond Fund, this year's top performing New York muni fund through August, fell to the bottom of the list for the month of September.
The US$5 million Pimco fund tumbled 3.3 percent last month as bonds it held issued by a New York agency on behalf of British Airways Plc plunged almost 20 percent after the Sept. 11 attacks.
As of March 31, the bonds were the fund's second biggest holding.
New York municipal bond funds suffered the biggest declines among all muni funds in September as buyers retreated because of concerns about how the attacks would affect the finances of the city and other municipal issuers. While all New York debt was affected, bonds tied to airlines and airports were hit the worst.
"All New York debt was marginalized" in September, said Paul Disdier, director of municipal securities at Dreyfus Corp, the mutual fund unit of Pittsburgh-based Mellon Corp.
The average New York municipal fund lost 1.1 percent in September, compared to a loss of 0.8 percent for the national municipal funds, according to New York-based fund tracker Lipper.
The New York funds slumped as investors demanded higher yields to hold bonds issued by New York City, by the Port Authority of New York and New Jersey -- which owned the World Trade Center -- and by industrial development agencies on behalf of airlines.
"The market's reacting to information that will change its opinion about New York City's ability to pay in the future," said William Fitzgerald, managing director at Nuveen Investments.
Before the attack, long-term New York City general obligation bonds yielded about 5.05 percent, said Paul Brennan, who helps manage about US$3 billion of New York municipal bonds for Nuveen.
Afterward, yields climbed to about 5.40 percent as New York bond prices plunged by about 4 points.
The bonds have since recovered much of their value. "We are seeing the market normalize because investors are becoming more comfortable with how the credit issues are going to be resolved," Nuveen's Fitzgerald said. "We know more about the role of the federal government in the recovery."
Bonds issued in New York State account for about 13 percent, or about US$169 billion, of the US$1.3 trillion of municipal bond market, according to Merrill Lynch & Co.
Standard & Poor's, which rates New York City GOs `A,' and Moody's Investors Service, which rates them `A2,' have not changed their ratings since the attack. Moody's has changed its outlook on the city from "stable" to "uncertain" -- a term it rarely uses. Outlooks, which may signal future changes in debt ratings, are normally positive, negative or stable.
Robert Kurtter, senior vice president at Moody's, said federal aid and proceeds from insurance claims should help the city recover from the attack.
``What nobody knows is whether all, most or some of the economic loss will be offset,'' he said.
The Port Authority owns the three New York-area airports -- John F. Kennedy International Airport, LaGuardia Airport and Newark International Airport in New Jersey.
With air travel down one third from a year earlier in September, Standard & Poor's issued a negative outlook to all airport bond issuers, including the Port Authority, which it rates `AA-,' said Colleen Woodell, an S&P managing director.
The Port Authority's outstanding debt totals about US$6 billion. Income from the bonds is exempt from state income tax in both New York and New Jersey, making them eligible for purchase by New Jersey municipal funds as well. New Jersey funds were the worst performing municipal funds after New York fund in September, losing 1 percent on average.
Among other funds holding muni bonds tied to airlines, the US$234 million Alliance Municipal Income Fund New Jersey Portfolio lost 3.4 percent in September, more than any other municipal fund.
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