Insatiable: Investors couldn't get enough of U.S. municipal bond funds in 2019

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For the 51st week in a row, investors put their money to work in the municipal bond arena as they continued to pour cash into tax-exempt mutual funds.

Muni funds are popular with individual investors and, for most of 2019, mom and pop buyers have felt confident enough in the sector to keep on investing, even as yields have been on the decline.

In the week ended Dec. 25, weekly reporting tax-exempt mutual funds attracted $1.695 billion of inflows, after inflows of $1.558 billion in the previous week, according to data released by Refinitiv Lipper late on Thursday.
Exchange-traded muni funds reported inflows of $132.646 million, after inflows of $136.296 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.562 billion after inflows of $1.421 billion in the prior week.

“Muni mutual funds are the dominant portion of the muni fund space ($773 billion in munis held at mutual funds vs. $42 billion at ETFs as of 2Q 2019, per the Fed),” Janney said in a Friday market comment. “That said, the growth of muni ETFs this year cannot be ignored. Since mid-September, the largest muni ETF 'MUB' has recorded daily inflows as investors look at easy ways to access the asset class and diversify their portfolios.”

The four-week moving average remained positive at $1.356 million, after being in the green at $1.521 billion in the previous week.

Long-term muni bond funds had inflows of $1.212 billion in the latest week after inflows of $1.182 billion in the previous week. Intermediate-term funds had inflows of $324.204 million after inflows of $315.476 million in the prior week.

National funds had inflows of $1.527 billion after inflows of $1.342 billion while high-yield muni funds reported inflows of $380.898 million in the latest week, after inflows of $421.442 million the previous week.

Earlier Thursday, the Investment Company Institute reported that long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.385 billion in the week ended Dec. 18. Long-term muni funds alone saw an inflow of $2.211 billion while ETF muni funds alone saw an inflow of $175 million.

Despite a lackluster end to the week before the New Year holiday the future looks bright going ahead.

“There’s not much to speak of in the market today, this week or next week for that matter, with no new issues pricing until the first full week of January, and desks are short staffed for the holidays,” Dan Urbanowicz of Zions Capital said Friday.

At the same time he said investor appetite hasn’t abated and should remain healthy in 2020.

"Muni fund inflows continued for a 51st consecutive week, which should lead to strong demand to start the year,” he said.

Muni money market fund outflow
Tax-exempt municipal money market fund assets fell $1.43 billion, bringing total net assets to $136.42 billion in the week ended Dec. 23, the Money Fund Report, a publication of Informa Financial Intelligence, reported on Thursday.

The average seven-day simple yield for the 187 tax-free and municipal money-market funds increased to 0.84% from 0.72% in the previous week.

Taxable money-fund assets rose $11.10 billion in the week ended Dec. 24, bringing total net assets to $3.421 trillion. The average, seven-day simple yield for the 805 taxable reporting funds declined to 1.28% from 1.29% in the prior week.

Overall, the combined total net assets of the 992 reporting money funds rose $9.68 billion to $3.557 trillion in the week ended Dec. 24.
Primary market
There are no major bond sales slated for the upcoming holiday-shortened trading week, with only three deals on the competitive calendar, including Wallkill, N.Y.’s $3.11 million of public improvement GO bonds, Freetown, Mass.’ $5.7 million of bond anticipation notes and Orleans County, N.Y.’s $3.7 million of BANs.

Leading the competitive calendar for the week of Jan. 6, 2020 is the New York Metropolitan Transportation Authority, which is coming to market with $2.4 billion of deals, composed of $939.6 million of green revenue bonds and $1.5 billion of bond anticipation notes.

Also on tap for the week after next are competitive sales from New Jersey ($325 million), the New York City Transitional Finance Authority ($109 million) and Westchester County, N.Y. ($200 million).

Secondary market
Munis were mixed on the MBIS benchmark scale, with yields falling two basis points in the 10-year maturity and rising less than a basis point in the 30-year maturity. High-grades were stronger, with yields on MBIS AAA scale falling one basis point in the 10-year maturity and falling two basis points in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO fel one basis point to 1.44% while the 30-year slipped one basis point to 2.08%.

“The ICE muni yield curve is one basis point lower in low volume trading as it takes direction from Treasuries today,” ICE Data Services said in a Friday market comment. “High-yield and tobaccos are also one basis point lower. Taxables are up to four basis points lower and Puerto Rico is unchanged.”

The 10-year muni-to-Treasury ratio was calculated at 76.8% while the 30-year muni-to-Treasury ratio stood at 90.0%, according to MMD.

Stocks were little changed as were Treasuries.

The Dow Jones Industrial Average was up about 0.20% as the S&P 500 Index rose around 0.04% and the Nasdaq fell about 0.08%. The Treasury two-year was yielding 1.589%, the five-year was yielding 1.678%, the 10-year was yielding 1.868% and the 30-year was yielding 2.310%.
Previous session's activity
The MSRB reported 17,481 trades Thursday on volume of $5.67 billion. The 30-day average trade summary showed on a par amount basis of $11.63 million that customers bought $6.24 million, customers sold $3.39 million and interdealer trades totaled $2.01 million.

California, New York and Texas were most traded, with the Golden State taking 20.101% of the market, the Empire State taking 10.958% and the Lone Star State taking 7.657%.

The most actively traded security was the Los Angeles Community College District S2016 taxable GO 1.65s of 2020, which traded 18 times on volume of $16.66 million.

Week's actively traded issues
Some of the most actively traded munis by type in the week ended Dec. 27 were from New York issuers, according to IHS Markit.

In the GO bond sector, the New York City zeros of 2038 traded 18 times. In the revenue bond sector, the New York State Dormitory Authority 4s of 2047 traded 66 times. In the taxable bond sector, the DASNY 3.19s of 2043 traded 68 times.

Week's actively quoted issues
Puerto Rico, New York & New Jersey and California bonds were among the most actively quoted in the week ended Dec. 27, according to IHS Markit.

On the bid side, the Puerto Rico Sales Tax Financing Corp. revenue 5s of 2058 were quoted by 25 unique dealers. On the ask side, the Port Authority of New York and New Jersey revenue 5s of 2041 were quoted by 160 dealers. Among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 10 dealers.

Christine Albano contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.

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Secondary bond market Primary bond market Municipal bond funds State of California State of Texas State of New York City of New York, NY New York State Dormitory Authority Puerto Rico Sales Tax Financing Corp (COFINA) Metropolitan Transportation Authority Port Authority of New York & New Jersey
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