Municipal bond funds reported outflows for the first time in 10 weeks.
Fund flows came in at negative $790.3 million for the week ending July 9, down from inflows of $193.6 million the week before, according to Lipper FMI.
Market participants blamed Puerto Rico's sell-off for outflows. These fund flows show the ongoing Puerto Rico crisis' true impact on the rest of the municipal bond market, they said.
High yields funds also reported strong outflows of $691.1 million after inflows of $5.7 million last week.
The commonwealth's general obligation bonds and bonds issued by Puerto Rico organizations began selling off June 28, when Puerto Rico Gov. Alejandro García Padilla signed into law a bill that allows its public corporations to restructure their debts. Credit rating agencies quickly downgraded Puerto Rico debt or put the debt on negative credit watch.
Munis also began selling-off after the restructuring law was passed, with yield rising across the curve from July 1 to July 9.
John Dillon, chief municipal bond strategist and managing director at Morgan Stanley, wrote in a report released on Wednesday that Puerto Rico troubles may continue to plague the muni market.
"Market participants should be aware of potential broad market volatility from Puerto Rico's impact in the coming week," Dillon said.
Fund flows for all municipal bond funds had hit low levels last week, but market participants attributed that to the shortened week leading into the July 4th holiday. Inflows have remained strong throughout the second quarter, and for most of the year.
"Should this summer turn out to be uneventful, we would expect munis to outperform into the heart of the summer," Dillon wrote. "Conversely, our larger concern would be for a combination of sharply rising yields and broader muni volatility stemming from Puerto Rico valuations. Without upward UST rate movement, any potential market disruption from Puerto Rico's impact may be short-lived and represent an opportunity to acquire non-PR bonds."
The largest deal next week is $1.4 billion of California Bay Area Toll Authority revenue bonds.
The New York City Transitional Finance Authority will sell $675 million in the negotiated market and $125 million in the competitive market.
Colorado will bring the largest deal in the competitive market next week: $500 million of tax and revenue anticipation notes.
