Inflows Regain Some Momentum With $928M Coming in Last Week

The pace of new money flooding into municipal bond mutual funds appears to be picking up again after a lull.

According to Lipper FMI, the muni funds that report their figures weekly posted $928 million in new cash from investors during the week ended Jan. 27.

That was the heaviest weekly inflow since October.

All muni funds — including those that report their figures once a month — have been reporting inflows at an average rate of $1.27 billion a week for the past four weeks, according to Lipper. That is the quickest pace in five weeks.

Mutual funds have kicked off 2010 with continuing gushers of new cash from retail investors.

Last year set records. Funds posted $79 billion in inflows in 2009 and the industry’s assets catapulted 36% to $464 billion. Assets have since climbed further to $471 billion.

Portfolio managers cite a litany of reasons retail investors have flocked to muni funds since early last year.

Tax rates are expected to tick up. Many investors remain cautious about stocks. Municipalities have safer credit histories than corporations.

Really, though, mutual funds have been a beneficiary of a technical dynamic.

Interest rates in safe havens are basically zero. According to iMoneyNet, the average tax-free money fund yields 0.02%.

The primary reason for the river of cash flooding mutual funds, many portfolio managers say, is people are fed up with such minuscule returns and are looking for alternatives.

Tax-free money funds coughed up more than $90 billion in 2009, according to the Investment Company Institute, and that was the likely source of much of the municipal mutual fund industry’s inflow.

George Friedlander, municipal strategist at Morgan Stanley Smith Barney, has written that he sees nothing disrupting this continued migration of money from cash into bond funds.

Households still hold $7.74 trillion in deposits, according to Federal Reserve data as of the end of the third quarter.

Even a modest runoff from this mountain would support municipal borrowing, which last year topped $400 billion.

Last week the Securities and Exchange Commission passed new measures that are likely to pull yields on money market funds down even more, if that is possible.

In response to a run on the industry in September 2008, the SEC imposed more stringent credit requirements and maturity limits on money market funds.

The type of paper eligible to be purchased by tax-free money market funds is by all accounts already snapped up as soon as it becomes available.

By further restricting what the $386.6 billion tax-free money fund industry can buy, the new regulations are likely to yank yields further down.

“Yields will be lower, all things being equal,” said Michael Sebesta, director of liquidity management for StableRiver Capital Management. “Already there’s not much yield out there in a lot of these products. You’ve still got an awful lot of dollars chasing very few bonds out there. For the investing public I think it’s very positive, but there will be a cost as a result of full compliance.”

Federated Investors, the third-biggest money fund manager, offered a good illustration of how ravenous the competition for money fund-eligible paper is.

The Pittsburgh-based company’s revenue shrank 12% in the fourth quarter, mainly because it had to waive some of the fees it charges for managing money market funds.

If the company charged the fees, investors in some of its funds would end up with less money than they put in, ­Federated said.

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