Most Florida bond funds finished in the black last quarter, but not by a lot.
Investors in the typical fund lost a little principal but came out ahead thanks to dividend payments. The average long-term fund returned 0.64 percent for the quarter (a 2.56 percent annual rate.) Insured long-term funds were up a tiny 0.14 percent, while intermediate-term and short-term funds both gained 0.58 percent.
The problem? Even though the Federal Reserve Board lowered short-term interest rates, long-term rates inched up slightly.
"It's been a really unsettled period in the market," said Cynthia Clemson, manager of the Eaton Vance Florida Municipal Bond Fund in Boston. "The whole Fed issue _ are they going to cut, are they not going to cut? _ has added a lot of uncertainty to the market."
High-yielding, lower-rated bonds delivered some of the quarter's best performances, said Tom O'Shaughnessy, manager of the Nuveen Florida Municipal Bond Fund in Chicago.
"The higher the income your fund generated, the better you looked," he said. Demand for higher yields has prompted investors to take more risk, reducing the price gap between low-quality and high-quality bonds. But when a lot of investors are looking for yield, it becomes difficult to find good deals.
"We haven't been as happy about the opportunities in Florida as we have with the rest of the country," said Merrell Hora, manager of the Oppenheimer Florida Municipal Bond Fund in New York.
One thing Florida bond fund managers are watching is whether this year's reduction in the state intangibles tax will reduce investor appetite for Florida bonds.
Part of the appeal of Florida funds is that they are exempt from the state tax. But under the new law, the first $250,000 in taxable assets is exempt for single taxpayers. Married couples get double that exemption. In theory, that means a smaller market for Florida bonds since thousands of Florida investors will no longer get any special benefit by sticking close to home with their investments.
Florida bonds are selling for a slightly smaller premium than they once did, but demand continues to be high.
"They're not as attractive as they once were, but they're still very attractive," Clemson said. "We're seeing more demand for municipal bonds among retail investors than we have in years."
O'Shaughnessy said some investors just like investing in their own communities.
Bond investors are continuing to watch the Fed: Will there be more interest rate cuts or will the economy start to respond to those that have occurred?
"There is the possibility that all the Fed easing finally kicks in and everything comes back to life, but we're leaning more to the negative side," Hora said.
A weak economy is considered good for bonds because inflation is no threat.
"The biggest impact on bond prices is investors' expectations of inflation," O'Shaughnessy said. "From what I'm hearing, people aren't talking about inflation like they used to. Most of the debate today is whether or not we're in a recession."