Money continued to drain out of municipal bond mutual funds last week - albeit at a slower pace - as the financial crisis continued, chasing capital into safe havens.
Muni funds that report figures weekly suffered net outflows of $303 million during the seven days that ended Dec. 3, according to AMG Data Services. The outflows represented 0.13% of muni fund assets.
The net withdrawals mark a slowdown from outflows of $446 million the previous week and $397.2 million the week before that, the Arcata, Calif.-based fund tracker said.
It also represents a substantial slowdown from October, when outflows exceeded $1 billion three straight weeks.
Still, this was the 11th consecutive week of net outflows following 27 straight weeks of inflows, AMG said.
"People continue to shed our asset class," said Doug Gaylor, portfolio manager at Dreyfus Corp. "I think they are seeking more safety. ...When you have a flight to quality, it is what it is. Eventually it will revert, but over what timeframe is still to be decided."
Markets were pummeled last week as the organization responsible for tracking business trends, the National Bureau of Economic Research, determined the economy has been in recession since December 2007.
Oil plummeted below $45 a barrel and the stock market coughed up most of its gains from earlier in the week. The Standard & Poor's 500 index is down more than 40% for the year.
In the seven days measured in this report, the yield on the 10-year Treasury note squeezed to less than 2.7% from 3%. The yield has since compressed even further.
The plunging yield on the Treasury note the past six weeks - to 2.56% last Thursday from more than 4% in mid-October - represents a worldwide flight to safety. With liquidity at a premium, the spread of virtually all fixed-income investments - from foreign government debt to asset-backed bonds - over Treasuries has widened significantly. Munis are no exception.
The relative illiquidity of municipals has depressed their value during this flight to safety. Nowhere is this better illustrated than in the relationship between the yield on munis and the yield on Treasuries.
Top-quality, 10-year munis have traditionally yielded about 80% to 90% of Treasuries with comparable maturities. That relationship was already out of whack going into last week, with triple-A rated, 10-year munis yielding 134% of 10-year Treasuries.
With the barbs of the financial crisis sharpening, the spread swelled last week. By Wednesday, 10-year, triple-A rated munis were yielding more than 150% of 10-year Treasuries, an unprecedented spread.
Among all muni funds, including those that report their figures monthly, withdrawals have slowed to an average of $313.8 million a week the past four weeks. That is down sharply from the average of nearly $1 billion a week the preceding four weeks.
Taxable bond funds reporting weekly reported inflows of $513 million. Equity fund inflows were $284 million for the week.