BNY Mellon unit is ditching risk in its muni funds

Standish Mellon Asset Management Co. LLC is scaling back the level of risk within its municipal bond portfolios but isn't worried about massive defaults among local and state governments, according to an executive at the firm. Financial advisers are more concerned than ever about the risk in the muni market due to a number of reports in the media about the pending disaster in this area, said Christine Todd, managing director of tax-sensitive strategies at Standish, a subsidiary of BNY Mellon Asset Management that specializes in fixed income. “As a muni manager, in the past, we could barely get anyone to pick up our calls,” she said. “Now we get a flurry of calls every time there is an article in the paper on this.” One of the biggest risks that muni bonds face is the public perception that there is about to be a wave of defaults among municipalities, Ms. Todd said. “There is a growing perception that the U.S. municipalities are comparable to the sovereign debt in countries such as Portugal and Spain,” she said. “The problem is, perception becomes reality.” The potential risk is that as the story about the pending fall of municipalities gains traction, it will cause liquidity problems for the muni market because that liquidity is so reliant on retail investors, Ms. Todd said. Regardless, The Bank of New York Mellon Corp. has spent the past several months unwinding the credit risk of its municipal bond funds, she said. The firm has sold out of the lowest-quality bonds. The firm also has begun significantly underweighting general-obligation portfolios, Ms. Todd said. “It's a legitimate concern that credit quality is deteriorating,” she said. “But we don't think we will see widespread defaults in the general-obligation market.” There are a number of indicators that there won't be massive defaults among municipalities, Ms. Todd said — for example, spending cuts, the ratio of debt to gross domestic production, and funding of capital projects. Standish has $63 billion in assets under management. E-mail Jessica Toonkel Marquez at jmarquez@investmentnews.com.