Buy Side

Mutual Funds On A Roll

Municipal bond mutual funds continue to amass record quantities of cash from investors, building a pillar of demand for state and local government debt even as bond yields have never been lower.

Investors entrusted $1.51 billion to muni funds that report their figures weekly during the week ended Sept. 16, according to Lipper FMI. That was the highest weekly inflow reported since Lipper started keeping track in the early 1990s.

Lipper, a unit of Thomson Reuters, last month bought AMG Data, which had compiled the data for years.

The weekly figure excludes certain funds that only report once a month. The entire sector, including these funds, has been reporting an average inflow of $2.64 billion a week for the past four weeks.

The record four-week average prior to this year was $1.37 billion.

Investors have plowed $56.4 billion into muni funds this year, more than twice the record for inflows over any 52-week period before this year.

Muni fund flows began breaking records in May and at first only reversed the drainage of cash the industry suffered during the financial crisis last year. The industry's assets shriveled 16.3% between the Lehman Brothers bankruptcy and the end of 2008, and did not recover until June.

Since then, though, cash has continued to inundate the industry at an unprecedented pace. The sector's assets have grown 28.3% this year, to $44.91 billion.

The biggest muni fund, Vanguard Intermediate-Term Tax-Exempt Admiral Shares, is at its richest net asset value since February 2005. The 15 biggest muni funds are all at their highest NAVs in at least a year.

Analysts say much of the money is likely coming from money market funds, which are safe havens that investors flocked to during the credit crisis last year.

Assets in tax-free money market funds - which offer ironclad safety at a yield often lower than a bond fund - swelled to $520.47 billion last September from $470 billion at the beginning of the year, according to the Investment Company Institute.

Investors who scurried to safe havens during the crisis are now emerging, either because they are more confident about the economy or tired of earning nothing on their money.

Tax-free money funds now yield an average of 0.05%, according to iMoneyNet, a record low. Investors have withdrawn almost $90 billion from tax-free money funds since last September, ICI said.

Cameron Brandt, global markets analyst with EPFR Global, wrote in a report that much of the money emerging from safe havens is landing in U.S. bond funds because people are still nervous about stocks. Investors continue to gravitate towards an asset class viewed as safer and less volatile than equities Brandt wrote.

Cash-rich muni funds have helped tip the supply-demand scale into what many traders say is an imbalance: too much cash chasing not enough paper.

Muni fund assets have grown almost $100 billion in a year in which issuance of tax-exempt bonds is down 17.7%, according to Thomson Reuters.

The yield on triple-A and double-A rated intermediate-term municipal bonds reached all-time lows last week, according to Municipal Market Data. Many traders say yields are too low, but there is simply not enough supply to meet the surge in demand from muni funds.

A trader last week said funds are buying "anything and everything that isn't nailed down."

At the end of the second quarter, muni funds owned 15.5% of the $2.779 trillion of outstanding municipal debt, according to Federal Reserve data released last week, the largest share since 2002.

And that was after a quarter in which commercial banks and property-casualty insurers stepped up their buying and also before the fund flows really started to take off.

Muni bond funds have taken in more than $2 billion a week on average in the third quarter.


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