The river of new money flowing into municipal bond mutual funds shows no sign of subsiding, rebounding the past two weeks after a brief dip at the beginning of the month.
Municipal bond mutual funds that report their figures weekly posted $895.3 million in new cash from investors during the week ended Feb. 17, according to Lipper FMI.
That was in the top 5% of all weekly flows since Lipper started tracking the numbers as AMG Data Services in 1992.
The weekly number only includes funds that report their figures each week, which represent about two-thirds of the 597-fund municipal mutual fund industry.
Among all funds, including those that report their figures once a month, inflows have averaged $1.33 billion a week for the past four weeks.
That is the highest four-week average this year, and would have been a record before 2008.
The latest numbers show something of a rebound from earlier this month, when the four-week average slipped to $791.6 million.
That was the lowest four-week average since April.
“The declining rate of inflows into term muni mutual funds seems to have bottomed,” Chris Holmes, municipal strategist at JPMorgan, wrote in a note to clients.
Holmes pointed out how flows have picked up again despite low yields. The yield on the 10-year triple-A municipal is just 2.89%, according to the Municipal Market Data scale, about 30 basis points above the all-time low registered in September.
Chris Johns, who manages a $254.4 million Colorado fund for Aquila Group, offered two reasons investors continue to entrust their money to municipal funds even at such low yields.
One is a widespread expectation that federal income tax rates are headed higher, which would make tax-exempt yields more appealing for high-tax-bracket investors.
The other is that for investors looking for safe credit and low volatility, returns elsewhere are puny.
The average yield on a tax-free money market fund — which offers super-secure credit and liquidity — is just 0.02%, according to iMoneyNet.
That yield explains some of the exodus from money funds and to municipal funds, Johns said.
Tax-free money funds coughed up $89 billion last year, or 18% of their assets, according to the Investment Company Institute. Municipal funds reported to ICI $69 billion in inflows in 2009.
Johns does not see that dynamic shifting anytime soon. While the Federal Reserve last week raised the discount rate — the interest rate charged on loans issued directly to banks — Johns said this move has little predictive value for when short-term rates will increase.
