A Retail Tug-of-War as Individual Bonds Conquer Funds in March

March was the third month in a row that retail investors were net buyers of individual municipal bonds, and it also was the fifth consecutive month that mom-and-pop investors sold more shares of muni mutual funds than they purchased, according to the March Transparency Report published by BondDesk Group LLC.

The data indicates that there were 375,203 retail buy trades versus 146,379 retail sell trades, for a ratio of 2.6, according to the report from the Mill Valley, Calif., fixed-income technology company.

The ratio shows there were 2.6 times as many retail purchases than sales and that retail investors were bullish on individual bonds despite the current unsettled state of the municipal market, according to its author, Chris Shayne, a director at BondDesk.

The retail activity came amid a backdrop of seesawing municipal yields. The 30-year triple-A GO bond yield climbed as high as 4.7% early in the month and dropped to as low as 4.45%, and finished at 4.80% as of March 31, according to Municipal Market Data.

The market has stabilized since highly publicized reports of potential muni defaults and other factors sparked a wave of selling that began in late 2010 and continued into early this year.

Yields pulled back to their lows for the year in mid March in a flight-to-quality rally sparked by the earthquake and tsunami in Japan and military conflict in Libya.

“March selling levels have nearly returned to the pre-crisis levels, suggesting that retail investors’ concern about municipal default risk has subsided for the time being,” Shayne said.

While the ratio has remained consistent for three months, March had the second-highest volume of retail trading activity behind January, which saw retail buy trades peak at 403,218 versus 154,061 sell trades.

February, meanwhile, had the third-highest volume with 345,901 buy trades compared with 135,099 sell trades.

In addition, California, New York, and Texas remained the most actively-traded state names nationwide for the third consecutive month.

California had a 13.4% share with 50,393 trades, followed by New York, which had a 10.1% share with 38,042 trades, and Texas with a 6.8% share and 25,610 trades.

The retail buying was concentrated in the tax-exempt revenue bond sector, with a 62% share, followed by tax-exempt general obligation bonds at 29%. Taxable revenue debt and taxable GOs captured only 6% and 3% of the retail share, respectively.

Among those credits, individual retail investors showered their favor on double-A rated bonds, with California, New York, and Texas issues garnering most of their attention.

Shayne pointed out that the consistent pattern of retail buying individual bonds occurred as net outflows continued to plague muni mutual funds.

“During March, the retail market for individual municipal bonds continued to demonstrate that it is separate and distinct from the retail market for municipal bond funds,” he said.

Shayne cited data from the Investment Company Institute showing that muni mutual funds had a net outflow of $711 million for the week ended March 2, the largest weekly total during the month. The month concluded with negative net cash flow of $462 million in the week ended March 30.

The report is based on customer trades of municipal securities that have been reported by dealers to the Municipal Securities Rulemaking Board.

Retail trades are typically defined as transactions valued at less than $100,000 par value, according to the report.

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