The municipal bond market
Outflows from weekly reporting funds increased from the previous week, when they measured $1.31 billion, Lipper FMI numbers showed.
There have been 16 straight weeks of outflows to muni bond funds, to the tune of $26.4 billion. For the year to date, the balance stands at $22.8 billion.
Industry watchers argue that flows aren’t expected to bounce back soon, and furthermore constitute a general retreat by investors from most fixed income products.
Tax-exempt fund outflows accelerated sharply starting in June, George Friedlander, a municipal analyst with Citi, said in a research report. But so did those for taxable bond funds, which might be considered unusual, he added, given that they typically benefit from the automatic investment mechanisms 401(k) plans employ.
Friedlander said the outflows represent not a sharp shift into equity funds, but rather “to a degree, a function of the rise in long-term Treasury yields,” which rose 89 and 62 basis points, respectively, at the 10- and 30-year parts of the curve from June 5 through Sept. 5.
“Beyond that, we believe that concerns about additional increases in interest rates as the [Federal Reserve] reduces and then ultimately stops quantitative easing played a role,” Friedlander wrote. “And, given the continuing severe negative momentum in aggregate flows in both [taxable and tax-exempt] sectors, we suspect that it will take a substantial period of time before muni funds are again on firm positive footing.”
In another research report Matt Fabian, managing director, Municipal Market Advisors, echoed the point about positive flows.
“Without the emergence of another unique’ or event-driven demand vector, it is unlikely that fund demand will snap back to recent experience,” he wrote. “Meaning that, even though yields are now much higher and income opportunities appropriately better, the funds are unlikely to retain their former share of total asset ownership in the near future.”
Tax-exempt funds had added about $70 billion in cumulative weekly inflows from 2011 to their peak in March, Fabian wrote, representing a 15% increase in assets under management, prior to any capital appreciation.
Most important, though, investors may have been allocating a large portion of their dollars to a medium-term momentum trade so as to ride bonds richer in expectation of the Fed perpetuating its QE program rather than as a long-term move to tax-exempts.
“It follows that, once the related temporary gains in bond prices were realized, investors would retrain their cash elsewhere,” Fabian wrote.
On the week, muni demand in the secondary propelled tax-exempts on Thursday, following three mostly lackluster trading sessions. High-grade deals this week met decent demand while lower-graded deals saw higher yields.
Tax-exempt yields fell across the intermediate and long ends of the curve. The 10-year triple-A yield plunged 12 basis points on the week to 2.87%.
The 30-year yield dropped seven basis points to 4.41%. The two year held steady at 0.43% for a 41st consecutive session.
Treasury yields mostly hovered on the week, ending up to one basis point weaker across the curve. This left muni ratios to Treasuries slightly richer.
The two-year ratio ended the week flat at 98%. The 10-year fell four percentage points to 99%; the 30-year ratio slipped to 115% over the span.
An argument can be made that outflows may have peaked, said John Mousseau, a portfolio manager at Cumberland Advisors. As rates have climbed this summer, most investors who’ve wanted out of muni funds have likely left them, he said.
“If people hadn’t liquidated funds, their attitude is: why am I doing it now,” Mousseau said. “Because, if anything, you make the case that yields are high enough that you should probably see funds flowing in, not out.”
Assets for all muni funds that report their flows weekly decreased to $280.2 billion, a 10th straight week of decline. The previous week they reported assets at $282.0 billion.
The value of the holdings for weekly reporting funds rose $123 million. The week before, they fell $596 million.
The four-week moving average for all municipal bond mutual funds that report their flows weekly was $1.77 billion of outflows, compared with $1.60 billion of outflows the week before.
Long-term muni bond funds that report flows weekly continue to bear the brunt of investors’ lack of demand. They recorded outflows for a 28th consecutive week, at $1.04 billion, compared with $943 million for the week of Sept. 4.
Weekly reporting high-yield muni bond funds also saw outflows for the 10th straight week. For the week of Sept. 11, $168 million poured from funds, against $266 million that left funds one week earlier.
Assets for high-yield funds that report their flows weekly fell to $34.93 billion, from $35.07 billion the week before.
The value of the holdings for high-yield funds increased by $18.2 million. Last week, they fell by $102 million.
The four-week moving average for all high-yield municipal bond funds that report their flows weekly showed $307 million of outflows, from $319 million of outflows the week before.
