The flow of new cash into municipal bond mutual funds continued to recede last week as investors began to rediscover their appetite for risk.
Inflows shrank for the third straight week as investors entrusted $417.6 million to municipal funds during the week ended Sept. 29, according to Lipper FMI. The report suggests the influx of funds that marked the end of summer has concluded.
Inflows set a record last year, according to the Investment Company Institute, with $69 billion in new money.
However, inflows decelerated earlier this year and April was the weakest month for new money since the height of the financial crisis.
Inflows recovered in August with the Treasury market on fire and markets feeling jittery as investors began pouring new money into municipal funds again.
The $5.1 billion August inflow is the strongest since the record injection of $10.14 billion in September 2009 and the sixth-strongest since ICI began tracking this data in 1984 — 320 months ago.
Barring a reversal in investor sentiment, 2010 is on pace for the second-heaviest annual inflow, after 2009.
Still, the stream of new money slowed precipitously last month to about $3.5 billion, according to Lipper.
Funds have reported weekly inflows at a pace of $868.9 million the past four weeks, down from the blistering $1 billion pace recorded during most of August.
“Municipal mutual funds had another week of positive net inflows,” Chris Holmes, an analyst at JPMorgan, wrote in a note to client. “However, flows have tapered in recent weeks.”
The slowing flow of money into municipal bond mutual funds comes against the backdrop of a resurgent stock market. The Standard & Poor’s 500 Index surged 8.8% in September, and the yield on the 10-year Treasury inched up four basis points.
In its weekly report, EPFR Global indicated that heartier risk appetites are driving flows into riskier types of mutual funds.
“My feeling is there’s more people that are getting concerned about rates going higher,” said Chris Johns, who manages a $300 million Colorado fund at Aquila Group of Funds. “The whole asset shift from equities to fixed income is slowing down a little bit. I wouldn’t expect the next 12 months to be as lucrative to bond funds as the last 12 months have been.”
The evidence of higher risk appetites among investors dovetails with the latest ICI report on money market funds. The tax-free money fund industry coughed up $2.29 billion during the week ended Sept. 29. The industry, which represents a safe storage place for cash, has bled $17.5 billion since Aug. 4.
The municipal fund industry’s assets grew last week for the 15th consecutive time, bolstered by inflows of $417.6 million and $337 million in market gains.
Municipal funds’ assets have swelled 13.5% this year to a record $527.1 billion, according to Lipper, and are being fueled by $31 billion in new money and $30 billion in market gains.
The industry’s assets have ballooned 54% since the end of 2008.
The slowdown in new money coincides with a sharp increase in supply of new bonds. Municipalities are slated to sell more than $13 billion in new debt next week. Supply during the summer was particularly light at times, especially in August.
