Cash withdrawals from municipal bond mutual funds accelerated last week, proving that commitment from the retail community remains fragile even when muni bonds are doing better.
Municipal bond funds that report their figures weekly posted a net outflow of $1.04 billion during the week ended March 2, according to Lipper FMI, up from the $610.4 million outflow the previous week. This interrupts a six-week trend of moderation since the record $4 billion outflow during the week ended Jan. 19.
“We’ve seen just a little bit of an uptick in the last week or so,” said Vincent Harrison, who manages eight municipal bond mutual funds with about $1.1 billion of assets for Dupree Funds. “For a while redemptions were high and then it kind of leveled off. In the last week or so, it’s started picking up again.”
Harrison said the resurgence of outflows has “got us scratching our heads” because it came during a time of strengthening municipal bond prices.
From November through January, muni bond values and fund flows were like two drowning swimmers dragging each other deeper underwater.
When investors withdrew money from their funds, the funds had to sell bonds, depressing values. The drop in fund net-asset value resulting from the decrease in bond prices in turn frightened investors, who withdrew more money, reigniting the cycle.
From mid-November to early February, a period during which municipal funds reported more than $35 billion of outflows, they also booked $22 billion of market losses.
The moderation in outflows last month coincided with an improvement in the market for the underlying bonds. Amid a substantially slower exodus of cash from the industry, municipal funds have reported $8.7 billion of market gains the past six weeks.
The heftier outflow last week came despite a $2.8 billion market gain, with yields on the triple-A 30-year muni bond strengthening two basis points.
Investors were panicking when they watched the values of their funds fall every day, but the source of the fear in a time of declining yields is harder to understand.
“The share price increased for a while, and shareholders felt comfortable about that,” Harrison said.
Dupree’s flagship $844.3 million fund’s net-asset value has increased 2.3% since the recent peak in yields on Jan. 14.
“Maybe it’s profit-taking,” Harrison said.
