The Pimco Fund That Rose To The Top In A Year Of Distress

Tobacco Overload

On the topic of credit outlooks, no major segment of the municipal market seemed to have a worse prognosis heading into 2015 than tobacco bonds.

The agencies that sold the debt, which is repaid from legal-settlement money that states and localities receive from cigarette companies, didn’t anticipate that smoking would decline as much as it has since they started issuing the securities more than a decade ago. Because of that oversight, four out of five will eventually default, Moody’s said in a September 2014 report.

While that could still be the case, failures to pay may be pushed back. Cigarette consumption held steady this year for the first time since 2006. That sparked a rally in the riskiest tobacco bonds: they’ve gained 14 percent in 2015, the second- best of any market segment.

That’s been a boon for Pimco because the three largest holdings in its high-yield fund are tobacco bonds from New Jersey and Ohio.

“The tobacco sector has had pretty significant outperformance versus the broader high-yield muni market,” Hammer said. “Tobacco is still pretty attractive versus other traditional, less-liquid, lower-rated muni names.”