Muni Fund Inflows Hit 7-Week High

Municipal funds reported the biggest inflows in seven weeks, as interest rate concerns faded and investors sought high yields.

Fund inflows were $273.8 million for the week ending April 9, Lipper FMI reported Thursday. Flows have not been this high since the week ending Feb. 19, when they were $320 million.

"This is encouraging as we are nearing the end of tax season, and it appears that muni funds will emerge without suffering large outflows," Barclays said in a report released on Friday.

Lipper reported two straight weeks of negative flows prior to the week of April 9, with outflows of $212.2 million for the week ending March 26 and of $81.3 million for the week ending April 2. Flows had turned negative following a March 19 speech by Federal Reserve chair Janet Yellen, in which she said the Fed might raise interest rates sooner than expected.

On Wednesday the Federal Open Market Committee's minutes were released showing that the Fed has no intention of raising interest rates in the near future. Yellen has also said the Fed will not raise interest rates until the inflation rate and economic data improved.

"Flows are up, I think as a result of a couple things," Jim Colby, chief municipal strategist at Van Eck Global, said. "One reason flows are up is uncertainty as to the depth of the growth of the underlying economy. It is not putting pressure on the Federal Reserve to signal any immediate change in policy."

The fund flows' four-week moving average rose to $21.9 million from $9.4 million last week, while total assets increased to $283 billion from $282 billion.

Strategists said high-yield inflows were a main driver behind municipal bond fund flows turning positive.

"The high-yield to investment grade spread is 125 basis points over the long-term trend," Colby said. "It's another positive signal for fixed income that perhaps investors are paying attention to."

Chris Mauro, head of US Municipals Strategy at RBC Capital Markets, wrote in a report released on Friday that the rise in municipal flows this week was almost entirely caused by heavy inflows into municipal high-yield funds.

Municipal high-yield funds reported inflows of $323.5 million, up from $186 million last week. These funds have had inflows every week in 2014 except for the week ending Jan. 1.

High-yields' four-week moving average also grew to $190.6 million from $160 million, and the funds' total assets jumped from $398 billion to $392.6 billion the prior week.

Long-term municipal funds reported inflows of $342.9 million up from a mere $44.6 million last week.

Their four week average turned positive to inflows of $417.6 million from outflows of $372.5 million the week ending April 2. Total assets jumped to $151.7 billion from $150.6 billion the week before.

Flows for all municipal bond funds rebounded the week ending April 9, as funds reported the largest amount of inflows since the start of 2014.

Inflows to all municipal bond funds rose to $1.2 billion for the week ending April 9, up from $26.9 million outflows last week, Lipper FMI reported.

"These inflows are allowing investors to come back to fixed income with some confidence," Colby said. "Its short-term perhaps, but now investors are discovering some of the competitive advantages munis have to offer."

The four-week moving average for all municipal fund flows reached up to $274 million from outflows of $44.4 million the week before. Their total assets hit $533.8 billion from $531 billion previously.

These municipal funds reported consecutive outflows for the end of 2013 and the first three weeks of 2014 up to the week ending Jan. 15, as investors chose to put their money in equity over fixed income.

"Investors leaving the equity market in 2014 has led to municipal bond fund inflows," Colby said. "Equity has experienced a lot of volatility in 2014."

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