Does Outflow Spell the End of Cash Deluge, or Is It Just a Blip?

Investors withdrew more cash from municipal bond mutual funds than they invested last week for the second time in less than a month, possibly heralding the end of the tidal wave of money that has washed over the industry for more than a year.

Municipal bond mutual funds that post their figures weekly reported a net outflow of $204 million for the week ended April 14, according to Lipper FMI.

This comes two weeks after a $413.7 million outflow, which was the first in 65 weeks. All funds, including those that report their figures monthly, have been reporting an average of $339 million in inflows a week for the past four weeks, according to Lipper, the slowest pace since January 2009.

Is the historic stampede of cash into municipal bond mutual funds over?

According to the Investment Company Institute, investors entrusted $69 billion to municipal funds last year, which was easily a record and topped the inflows from the previous 15 years combined.

While few fund managers expected that pace to last forever, the trend has clearly slowed down this year. Inflows in the first 15 weeks of 2010 year have totaled a little more than $15 billion, according to Lipper, compared with $22.3 billion the last 15 weeks of 2009.

Chris Holmes, muni strategist at JPMorgan, is not so quick to leap to the conclusion that the latest outflows signal an ebb in investor confidence in municipals.

Early April is a seasonally slow period for mutual fund inflows because people take money out of their accounts for tax payments.

Based on data from ICI, the month of April has supplied just 3% of the industry’s inflows since 1984.

In a note to clients, Holmes offered a good explanation why redemptions for tax season would be greater than usual this year.

Much of the onslaught of cash hitting municipal funds has come from investors growing intolerant of the minuscule yields on money market funds. Since the beginning of 2009, investors have shuttled $125 billion from their tax-free money funds, and Holmes said in many cases they are putting their money in intermediate-term municipal funds to pick up better yields.

The average tax-free money fund offers a yield of just 0.03%, according to iMoneyNet. The JPMorgan Intermediate Tax Free Bond Fund, to pick an example, yields 1.62%.

Because short- and intermediate-term municipal funds have served as a storehouse for cash — previously the domain of now-scorned money funds — municipal funds are now more subject to the factors that normally affect money markets.

That means people use municipal funds as a place to keep money before having to use it to pay taxes. Holmes’ conclusion is that the latest outflows are greater-than-usual seasonal redemptions for tax purposes, not an erosion in sentiment.

He pointed out that high-yield and long-term funds — less likely to be used for cash purposes — are still commanding new money from investors. Short-term funds, meanwhile have coughed up $225 million in the past three weeks.

For reprint and licensing requests for this article, click here.
Buy side
MORE FROM BOND BUYER