For most of this year, the municipal bond market has been buttressed by cash coming out of hiding.
The latest data suggests that maybe that trend has slowed down just a little.
The demand half of the supply-demand equation has been bolstered throughout 2009 by cash emerging from safe-haven money market funds and being put to work in municipal bond mutual funds.
The story goes like this: investors who scurried for safe perches during the worst phases of the financial crisis soon grew tired of earning next to nothing on their money funds, so they pulled their money out and invested it in municipal bond mutual funds to earn a better return.
While there is no definitive link between tax-free money market outflows and municipal mutual fund inflows, many market participants say the former has clearly fed the latter.
The correlation between the two numbers is striking.
Investors this year have spirited $81.75 billion from tax-free money market funds, according to the Investment Company Institute. They have entrusted $70.91 billion to municipal bond mutual funds, according to Lipper FMI.
Armed with all that cash, municipal bond mutual funds have bought tax-exempt paper and helped support a rally that has pulled the yield on 10-year triple-A-rated munis down nearly a full percentage point, according to a Moody’s Investors Service index tracking pricing on new issues.
While cash continues to flee the cocooned shelter of tax-free money market funds and land in municipal mutual funds, the last few weeks have shown the migration proceeding at a slower pace.
According to data from iMoneyNet, investors have moved $6.72 billion out of tax-free money funds in the past four weeks.
That represents the slowest pace of outflows in three months. The latest drainage of $1.33 billion in the week ending Nov. 24 compares with such staggering weekly outflows of $8.5 billion during the week ending Sept. 21 and $5.9 billion the week after that. The balance remaining invested in tax-free money market funds is $407.5 billion, according to ICI.
Tax-free money funds were shedding more than $4 billion a week in late September and early October.
“Compared to the early fall, it has slowed down,” said Connie Bugbee, managing editor at iMoneyNet.
Bugbee said it is not clear why. It is certainly not because the yields have grown more appealing. The average tax-free money market fund yields just 0.05%, according to iMoneyNet, a basis point better than the all-time low.
Bugbee said the slowdown may simply be because “the bulk of those who wanted to move have made their move.”
As for where the money is going, municipal bond mutual funds have been reporting noticeably lower bestowals from investors the past few weeks.
Investors poured $717 million into muni funds during the week ended Nov. 24, according to Lipper FMI. While high by historical standards, it is less than half the weekly average this year.
Cash is flooding into muni funds at a rate of $1.2 billion a week, based on the average over the past four weeks. Compare that to a four-week average of $2.9 billion at its zenith in early October.
In his weekly commentary earlier this month, Morgan Stanley Smith Barney muni strategist George Friedlander attributed the slowdown in fund flows to jitters over inflation and bad credit.
“The negative publicity about credit, plus confusion about the inflation outlook, are beginning to lead to additional caution among individual investors,” Friedlander wrote.
Friedlander also said that the slowdown in fund flows is likely the reason long-term munis have not enjoyed the rally that short- and intermediate-term munis have this month. The yield on the five-year triple-A muni has plunged more than 30 basis points, based on the Municipal Market Data yield curve, while the yield on the 30-year triple-A has risen five basis points.
“It seems clear that the sharply lower flows into muni funds are a contributing factor in keeping long-term muni yields from edging lower, even as shorter maturity yields have dropped fairly sharply,” he said.