Bond Mutual Funds and Closed-End Funds See Big Losses

As recently reported by Reuters, bond mutual funds and bond exchange-traded funds collectively have seen losses of $47.2 billion this month – the biggest monthly loss on record (citing research from Trim Tabs Investment Research).  Those outflows exceed outflows in October 2008 (the height of the global banking crisis) by more than $5 billion.  Bond prices have been falling since late May, when the Federal Reserve indicated that it could scale back its bond-buying program should the economy improve.

According to a Wall Street Journal article published earlier this week, entitled “Closed-End Funds Bite Back”, closed-end bond funds have been hit particularly hard – in part because of their widespread use of leverage to boost returns.  According to Morningstar, the average high-yield closed-end bond fund was down 10.7% in the past month (through last Thursday, 6/20).  The culprit for those outsized losses, in large part, is fund managers’ use of leverage to buy long-term debt securities that potentially will drop the most when rates rise.  Moreover, unlike open-ended mutual funds, closed-end funds issue a limited number of shares that trade on an exchange (much like stocks).

Earlier this year, FINRA published an Investor Alert warning investors that, should interest rates increase, investors could see substantial losses in bonds and bond funds.  Unfortunately, bond mutual funds and closed-end funds often are held by individual investors – including mom-and-pop investors and retirees – seeking safety of principal and income.  The Amato Law Firm has extensive experience prosecuting and defending disputes involving investment losses, and stands ready to evaluate cases arising in this area.

The foregoing information is provided by Amato Law Firm, LLC and Chicago securities lawyer Ronald M. Amato.  Mr. Amato is an experienced securities lawyer with substantial experience representing financial advisors, broker-dealers and investors in securities arbitration, employment transitions, and securities-related employment and regulatory matters.  He can be reached at 312.466.5521 or through the firm’s website at www.ramatolaw.com

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Ronald M. Amato, managing member of Amato Law Firm, LLC, is an experienced securities arbitration attorney. He represents investors, financial advisors, investment advisory firms and broker-dealers in FINRA arbitration, securities arbitration and securities-related employment and regulatory matters.
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