The stream of cash running into municipal bond mutual funds continued to taper slightly last week.
During the week ended Sept. 22, investors entrusted $613.6 million to municipal mutual funds that report their figures weekly, according to Lipper FMI.
This was the lightest weekly inflow since the first month of August and represents a modest dip in cash flows to the industry.
All municipal funds, including those that report their figures monthly, have reported an average of $990.3 million a week the past four weeks, still very high by historical standards.
“The numbers have been declining slightly over the last couple of weeks in terms of cash flow into the muni market, but still, it’s a positive cash flow,” said James Colby, senior municipal strategist at Van Eck Global. “We see a continued exodus from money market funds and equity funds. You know the money’s going somewhere. It’s generally going into fixed income, and in great part into munis.”
In 2009, investors withdrew $92.4 billion from tax-free money market funds and stuffed $69 billion into tax-free mutual funds, according to the Investment Company Institute.
So far this year, they have withdrawn $65.3 billion from tax-free money funds and deposited about $30.6 billion into municipal funds.
Money market funds at the end of 2008 owned 18.5% of outstanding municipal debt, compared with 12.3% now. Mutual funds owned 14.5%, compared with 18.1% now.
After a moderate sell-off to begin the month, municipals bounced back last week. The yield on the benchmark 10-year triple-A rated municipal slipped six basis points during the week measured in the latest Lipper report, based on the Municipal Market Advisors scale.
Municipal funds posted $800.3 million in market gains during the week. The average price for a municipal bond rose about 0.2% during the week, according to the S&P National AMT-Free Municipal Bond Index.
Municipal funds’ assets have grown 13.4% this year to $526.5 billion, fueled roughly evenly by market gains on holdings and new money from investors.
Funds have reported $30.6 billion in new money and $29.5 billion in market gains on bonds.
Despite the minor sell-off earlier this month, conditions remain just about perfect for bonds.
The Federal Reserve has repeatedly affirmed its commitment to interest rates kissing zero. According to Bloomberg LP, futures markets imply a 16.8% chance of a rate hike by mid-year 2011, compared with a 26.3% chance implied a month ago.
Trading in inflation-protected Treasuries implies an expected inflation rate of 1.3% over the next five years. The consumer price index in August rose less than 1% year-over-year.
These factors coupled with a volatile stock market have anchored Treasury rates at historically low levels, helping to bolster municipals.
Tax-exempt bonds are further benefiting from issuers’ opting to float debt in the taxable market. Nearly a third of municipal borrowing this year has been taxable, according to Bloomberg, creating a scarcity of tax-exempt debt.
