Inflows Perk Up a Bit, But Buyers Cut Back on Short Term

The stream of money flowing into municipal bond mutual funds picked up a little last week, but investors continue to cash out of short-term funds even past tax season.

Investors entrusted $135.6 million to municipal funds during the week ended April 28, according to Lipper FMI.

This brings the average weekly inflow over the past four weeks up to $378.3 million.

That’s the highest in three weeks but far lower than the lofty peaks of well over than $1 billion a week reached through most of 2009 and early 2010.

Much of the wave of the money hitting municipal funds last year and early this year landed in short-term funds.

Investors looking for returns superior to money market funds or bank deposits found their answer in mutual funds investing in state and local government debt with maturities of five years or less.

At the beginning of 2009, short-term municipal funds managed less than $17 billion in assets.

They commanded more than $22 billion in new money from investors from the beginning of 2009 through the end of March 2010.

The sector’s assets more than tripled, and went from managing 4.7% of the total municipal fund industry’s assets to nearly 10% of them.

The tide began to turn in March. Short-term funds have coughed up more than $400 million in the past five weeks.

Some market commentators believed that tax season may have been playing a role.

Because people were using short-term muni funds as short-term warehouses, they were more likely to tap those funds if they needed cash for tax payments.

Two weeks after the tax deadline, though, the outflows from short-term funds continue.

In a weekly report last month, George Friedlander, head of municipal strategy at Morgan Stanley Smith Barney, said flows into muni funds lately have been “unimpressive at best.”

Friedlander believes investors have begun to balk at the scrawny yields short-term municipals offer.

Last week the two-year triple-A municipal yield was 66.4% of a two-year Treasury.

An investor in the top tax bracket would pick up only one extra basis point by opting for a two-year tax-exempt triple-A municipal over a two-year Treasury.

“Clearly, investors are finding fund-generated yields in the shortest muni bond funds to be unattractive, and flows in this category seem to have ground to a halt, for now,” Friedlander said.

“If they continue to stay weak as tax time becomes less of a factor, and if issuance bounces back from current light levels, the market could come under modest pressure,” he said.

Not all the news was bad. High-yield funds have commanded an average of $108 million a week the past four weeks, the strongest pace in a month.

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