The amount of money investors have withdrawn from municipal bond mutual funds continues to climb and break records for the year.

Weekly reporting funds had outflows of $1.61 billion for the week of June 12, according to Lipper FMI numbers released late Thursday afternoon. The previous week, muni bond funds reported $1.47 billion in outflows, the most since the week of Dec. 19, 2012, when they reached $2.31 billion.

The muni market continued its downward trajectory this week as tax-exempts lost value as yields rose.

Last week's Lipper numbers, which rocketed from $157 million in outflows the previous week, shattered some industry analysts' expectations. As the muni market entered its seasonal redemption period, some predicted an accompanying increase in demand for tax exempts. Lipper numbers have so far quashed those hopes.

"It was déjà vu all over again for municipal bond fund flows this week," Chris Mauro, director of municipal bond research at RBC Capital Markets, wrote in a note.

The redemption numbers, as well as current muni ratios to Treasuries above 100%, suggest the outflows may not last. RBC anticipated about $128 billion in coupon payments and principal redemptions will be returned to investors during June, July and August, Mauro wrote. Investors received an estimated $32 billion on June 1, he added.

Muni outflows need to be viewed within the greater context of all fixed income assets classes, according to Mauro and Alan Schankel, a managing director at Janney Capital Markets. The taxable fixed income sector, which had seen positive flows almost every week since 2009, reported $4.3 billion in net outflows the week of June 5, excluding exchange-traded funds, Mauro wrote.

Investors may be considering whether this is the big upturn in interest rates they've come to expect, Schankel added. If nothing more, it's certainly a general trend upward in interest rates that will lead to some instability in the muni market, he said.

"Every once in a while there will be an event and investors will be concerned that rates are going to shoot up quickly, so they'll get out," Schankel said. "And then things stabilize, and they'll get back in. You're going to have that kind of volatility going forward."

Yet muni fundamentals will still be strong, Schankel said. The general decline hitting Treasuries and other fixed income markets has dragged down munis with them.

"This downturn has been a little overdone," Schankel said. "Fundamentally, there's no really good reason for interest rates to move sharply higher from here."

The demographics have changed to favor fixed income securities, he said. There are more people in their 60s who would generally prefer to invest in fixed income than equities.

"So, we have not quite arrived at some kind of great rotation pivot point," Schankel said, "but there are elements of that."

Some factors explain the heavy outflows of June 5, muni analysts said. The sticker-shock from May's fixed income market correction played a part, Mauro wrote.

Additionally, tax-exempt money market funds reported inflows of $3.5 billion last week. These funds evidently received most of the June 1 payments, Mauro wrote. A share of this money should flow back into muni funds soon.

"Nevertheless, as munis get cheaper, they become more attractive on a tax equivalent basis," Mauro wrote.

Tax-free supply through May fell 12% behind last year's corresponding number, Schankel said. Expectations predicted that the muni market would have surpassed last year's amount by now.

More outflows to muni bond funds, which the industry largely anticipates as the yield curve continues to steepen, may help in one way, according to Dan Berger, a muni analyst with Municipal Market Data.

"The results, even if they indicate more outflows, will, at the very least, give the muni market a clearer direction," Berger wrote in a market post.

Assets for all muni funds that report their flows weekly plunged by more than $5 billion to just under $319 billion. The previous week they reported almost $324 billion.

The value of the holdings for weekly reporting funds plunged $3.45 billion. The week before, they had plummeted $755 million.

The four-week moving average for all municipal bond mutual funds that report their flows weekly was $793 million of outflows, compared to $315 million of outflows the week before.

Outflows continued to pour from long-term bond funds that report their flows weekly.

They continued for a 15th straight week, increasing to $1.54 billion. Long-term bond funds reported $1.28 billion of outflows the previous week.

High-yield muni funds experienced another week of substantial outflows.

Those high-yield funds that report flows weekly had $657 million in outflows, Lipper said.

The previous week, they reported $501 million in outflows.

Assets for high-yield funds that report their flows weekly fell to $43.61 billion, from $44.98 billion reported the week before.

The value of the holdings for high-yield funds dropped by $734 million. Last week, they fell by $186 million.

The four-week moving average for all high-yield municipal bond funds that report their flows weekly showed $362 million of outflows, from $184 million of outflows the week before.

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