The municipal bond market rally failed to encourage investors, who pulled a net $1.9 billion from the muni market for the week ending Sept. 11.
Outflows the previous week measured $1.3 billion, according to Lipper FMI numbers. There have been 16 straight weeks of outflows from muni bond funds, to the tune of $26.4 billion. For the year to date, the balance stands at $22.8 billion.
Industry watchers do not expect flows to bounce back soon, as recent weeks highlight a general retreat by investors from most fixed-income products.
Tax-exempt fund outflows accelerated sharply starting in June, George Friedlander, a municipal analyst with Citi, said in a research report. But so did those for taxable bond funds, which might be considered unusual, he added, given that they typically benefit from the automatic investment mechanisms 401(k) plans employ.
Friedlander said the outflows represent not a sharp shift into equity funds, but rather to a degree, a function of the rise in long-term Treasury yields, which rose 89 and 62 basis points, respectively, at the 10- and 30-year parts of the curve from June 5 through Sept. 5.
Beyond that, we believe that concerns about additional increases in interest rates as the [Federal Reserve] reduces and then ultimately stops quantitative easing played a role, Friedlander wrote. And, given the continuing severe negative momentum in aggregate flows in both [taxable and tax-exempt] sectors, we suspect that it will take a substantial period of time before muni funds are again on firm positive footing.
In another research report Matt Fabian, managing director, Municipal Market Advisors, echoed the point about positive flows.
Without the emergence of another unique or event-driven demand vector, it is unlikely that fund demand will snap back to recent experience, he wrote. Meaning that, even though yields are now much higher and income opportunities appropriately better, the funds are unlikely to retain their former share of total asset ownership in the near future.
Tax-exempt funds had added about $70 billion in cumulative weekly inflows from 2011 to their peak in March, Fabian wrote, representing a 15% increase in assets under management, prior to any capital appreciation.
Most important, though, investors may have been allocating a large portion of their dollars to a medium-term momentum trade so as to ride bonds richer in expectation of the Fed perpetuating its QE program rather than as a long-term move to tax-exempts.
It follows that, once the related temporary gains in bond prices were realized, investors would retrain their cash elsewhere, Fabian wrote.
An argument can be made that outflows may have peaked, said John Mousseau, a portfolio manager at Cumberland Advisors. As rates have climbed this summer, most investors whove wanted out of muni funds have likely left them, he said.
If people hadnt liquidated funds, their attitude is: why am I doing it now, Mousseau said. Because, if anything, you make the case that yields are high enough that you should probably see funds flowing in, not out.
Assets for all muni funds that report their flows weekly decreased to $280.2 billion, a 10th straight week of decline. The previous week they reported assets at $282.0 billion.
The value of the holdings for weekly reporting funds rose $123 million. The week before, they fell $596 million.
