Municipal bond mutual funds commanded a moderate sum of new money last week as investors remained averse to risk.
Investors entrusted $165.5 million to muni mutual funds during the week ended May 26, according to Lipper FMI.
This slug has become typical of the “new normal” that has emerged for municipal bond mutual funds in 2010, after abnormal gushers of cash in 2009.
Municipal funds have commanded an average of $395.5 million in new cash a week from investors for the past four weeks, the strongest pace since the first week of April.
By comparison, they commanded an average of $1.7 billion a week during the last four months of 2009.
Propelled by the new inflows and more than $1 billion in market gains last week, the municipal fund industry has grown to $496.36 billion in assets — a record.
Muni flows began picking up last month when risk appetites across the world disappeared and people looked for safe places to park their money.
Municipal bond mutual funds — particularly short-term funds — established themselves as something of an alternative safe haven last year.
By most measures, risk aversion remained elevated last week.
The Standard & Poor’s 500 Index slipped 4.2% during the seven days measured in the report. A measure of volatility known as the VIX remained high by recent standards.
The spread of the three month London Interbank Offered Rate over the overnight index swap rate — a measure of appetite for lending to high-quality banks outside the U.S. — was at 30 basis points, compared with 11 basis points at the end of April and nine at the end of March.
Since the financial crisis in 2008, municipals have tended to do well during times of fear, moving in sympathy with Treasury bonds.
This latest panic has been no different.
The yield on the 10-year triple-A municipal bond reached as low as 2.76% last week, according to Thomson Reuters, only about 20 basis points off its all-time low.
A higher percentage of the cash flooding the industry is now going to short-term funds.
For a few weeks investors were withdrawing money from short-term funds and concentrating on intermediate- and long-term funds.
Now, short-term funds are commanding 18% of the industry’s new money, with the remainder split between intermediate and long.
