Outflows to Muni Bond Funds Mark a Dark Week for the Market

After withstanding the heavy body blow dealt by Hurricane Sandy this week, the municipal bond market could not have been expected to keep up its streak of inflows to muni bond mutual funds.
It didn’t.
After 28 straight weeks of inflows to muni bond funds, the market saw outflow for the week ended Oct. 31. Funds that report their flows weekly recorded outflows of $123 million for the week ended Oct. 31, Lipper FMI numbers show.
That’s down significantly from the $666 million in inflows for the week ended Oct. 24. But muni bond funds have still seen inflows for 57 of the past 61 weeks. Furthermore, industry watchers still see healthy demand for munis among investors.
This week, the storm knocked offline much of the underwriting operations of the industry’s metropolitan New York-based banks. As underwriters recover and prepare deals for the days ahead, demand should prove more than sufficient for the market to absorb the coming calendars.
In the meantime, deals of varying sizes have emerged in the marketplace for investors.
A natural explanation could account for the outflows related to the hurricane. Reportedly, property and casualty insurers — which are large holders of muni bonds — have been liquidating funds for cash in preparation to cover all of the claims anticipated for storm damage.
Assets for all muni funds that report their flows weekly increased for a seventh straight week to $316.8 billion from $316.3 billion the week before.
The value of the holdings for weekly reporting funds rose for a second straight week, by $619 million. The week before, they increased by $517 million.
The four-week moving average for all municipal bond mutual funds that report their flows weekly saw almost $520 million of inflows, down from a $688 million gain the week before.
Long-term bond funds that report their flows weekly fell, as well. They saw strong outflows to the tune of almost $231 million. This represented a sharp drop from the $414 million of inflows they reported the week before.
High-yield muni funds reported outflows for the week. But flows have been positive for 45 of the previous 49 weeks.
High-yield funds that report weekly saw $86 million in outflows, Lipper said. The previous week, they reported $142 million in inflows.
Assets for high-yield funds that report their flows weekly increased to $43.29 billion, up from $43.20 billion the week before.
The value of the holdings for weekly reporting high-yield funds increased by $177 million. Last week, they increased by $99.2 million.
The four-week moving average for all high-yield municipal bond funds that report their flows weekly was $84.1 million of inflows, falling from $133 million the week before.