Net inflows into municipal bond mutual funds shot up to $1.44 billion during August, the Investment Company Institute reported.
The results followed a four-month span of smaller inflows into the funds. In July, the funds had a net inflow of just $344 million, according to revised figures provided by the Washington, D.C.-based institute.
The data -- which excludes reinvested dividends -- does not apply to closed-end funds or money market funds, which are tabulated separately.
The August gain brought the funds' year-to-date net inflow to $8.29 billion, most of which was taken in during the first quarter. Still, for the year-to-date, net inflows are outpacing those from 2005, when the funds took in $5.72 billion during the same period. Assets in muni bond funds totaled $353.7 billion at the end of August, according to ICI.
Preliminary data collected by AMG Data Services indicates that the higher inflows have continued in recent weeks, as the funds took in close to $500 million on average per week during September.
The upturn in inflows into muni bond funds may be partly due to what many believe could be the conclusion of a series of hikes by the Federal Open Market Committee to its target for the federal funds rate.
Citing the continuing moderation in economic growth, due in part to a cooling housing market, policymakers at the nation's central bank left their target for the key overnight bank lending rate unchanged at their September meeting, after raising it a total of 17 times over a two-year period to 5.25% from 1%.
"The Fed has stopped tightening," said Philip Fischer, a municipal market strategist at Merrill Lynch & Co. in New York. That has prompted a reallocation from cash and money market funds into bond funds, as many investors believe interest rates may not rise much further, according to Fischer.
Some of the inflows could also be coming from the stock market, which has been flirting with near-record highs, he said. The Dow Jones industrial average is up almost 9% this year, and yesterday finished at 11727.34, eclipsing the record close of 11722.98 from January 2000. "A lot of people are concerned about the stock market as it approaches record highs," Fischer said.
Meanwhile, muni bond mutual funds have managed to produce decent returns lately, Fischer said. That could make the funds more appealing to investors than the prospect of buying bonds at current market levels.
"Rates are awfully low," said Joe Deane, a municipal bond fund portfolio manager at Western Asset Management in New York. On Monday, 10-year, triple-A rated general obligation bonds were yielding 3.68%, according to Municipal Market Data.
Rather than locking in those low rates, Deane said he believes investors may be seeking professional management offered by mutual funds, which could be causing those higher inflows.
Fischer noted that much of the recent inflows have been to high-yield municipal bond funds, which investors have been attracted to for the higher returns they are able to produce by investing in lower-quality bonds and mitigating risks through diversification.
Net inflows into taxable bond funds rose to $5.23 billion in August, from $2.87 billion in July, ICI reported. For the year-to-date, taxable bond funds have had a net inflow of $22.26 billion, which is down slightly from $24.28 billion over the same period in 2005.
Stock funds had a net inflow of $4.8 billion in August, which was up from that of $738 million in July, according to the ICI. For the year-to-date, stock funds have had a net inflow of $118.56 billion, which compares to that of $90.36 billion over the same period last year.
Hybrid funds had a net inflow of $202 million in August, following a $99 million outflow in July. For the year-to-date, hybrid funds have only had a $1.05 billion net inflow, which is down dramatically from $23.21 billion over the same period in 2005.
Net inflows into tax-exempt money market funds fell to $1.94 billion in August from $8.41 billion in July. For the year-to-date, the funds have had a net inflow of $13.05 billion, which is still roughly on pace with last year, when they took in $13.61 billion over the same period.
Net inflows into taxable money market funds totaled $40.77 billion in August, which is more than double the $17.44 billion they took in during July. For the year-to-date, the funds have had a net inflow of $91.52 billion, which compares to a net outflow of $35.5 billion over the same period last year. (c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved. http://www.bondbuyer.com http://www.sourcemedia.com
