Why Are Investors Fleeing Muni Funds?

Last month, Morningstar reported that investors pulled $7.6 billion from muni bond funds, the category’s worst month for outflows except for the $8 billion redeemed in October 2008 during the credit crisis peak.

Investors had been pouring money into the class since January, 2009. Taxable bonds had their slowest month since May, with an inflow of $6.1 billion, down from $21 billion in Otober.

Rising rates and currency swings contributed to a tough month for emerging-market bonds and world-bond funds, some of the more aggressive areas of the bond market.

Nevertheless, money continued to flow to emerging-market bond funds. These offerings have collected more than $13.7 billion in 2010, and total assets have nearly doubled over the last 12 months to $36.8 billion.