Muni mutual funds saw outflows for four straight sessions last week as events in the rates market, among other factors, dictated flows, analysts said.
"When rates back up, folks get scared, and they see an uptrend in rates; they want to get ahead of it, and they start either purchasing less or actually start to sell off some. But when rates are coming down, it's the fear of missing out, and they try to buy in," said Peter Delahunt, managing director and head of the municipal bond department at StoneX.
The former is happening as the U.S. Treasury market remains under pressure, with crude oil above $100 per barrel, the war in the Middle East raging on and inflation continuing to raise the probability of rate hikes that could begin this week, he said.
Most recently, mutual funds saw outflows of $430 million on Friday, driven by $544 million of negative fund flows from open-ended funds, offsetting the $113 million of inflows from ETFs, according to J.P. Morgan.
Despite this, the recent daily outflow figures should be viewed as temporary, said Jason Wong, vice president of municipals at AmeriVet Securities.
The Federal Open Market Committee meets this week with the market pricing in a 90% chance of a rate hike. Therefore, market participants are in a wait-and-see position and are hopefully taking money out now and waiting until rates rise, he said. Once that happens, inflows will return, Wong added.
But right now, the market is dealing with daily outflows as muni market technicals cheapen a bit relative to Treasuries.
The recent spate of outflows followed a period of moderating weekly fund flows. Muni mutual funds saw inflows of $138.7 million for the week ending Sept. 2, followed by $192.8 million of inflows for the week ending Wednesday, according to LSEG.
The $192.8 million figure was "modest" at just 21% of the 25-week average, and the underlying daily data indicate a "clear loss of momentum," J.P. Morgan strategists said.
Part of the slowdown in weekly inflows stems from principal and interest rollovers peaking in August and now declining, Delahunt said.
P&I was $62.2 billion in August, but fell to $38.4 billion in September, according to CreditSights.
As P&I rollover slows but supply remains robust, technicals weaken because supply exceeds demand and demand can't keep up, "so that starts the ball rolling," Delahunt said.
Additionally, flows have been impacted by weaker equity returns.
While August was a decent month for equity returns, equities were down last week, said Pat Luby, head of municipal strategy at CreditSights.
"They've been spotty, so it doesn't surprise me terribly that flows slowed down," he said.
These recent outflows have not significantly affected fund flows for the year.
Muni mutual funds are still seeing near-record inflows year-to-date, with nearly $70 billion being added to muni mutual funds, the second-highest level on record after 2021's $83.3 billion inflows over the same time period, J.P. Morgan strategists said.
Many investors are either slowing down or not putting money into munis, but there's also evidence of other investors coming into the market and picking up better deals than a week ago, Luby said.
Helping is the fact it's not a bad time to put money to work, "where you can see a cyclical trade of people selling equities going into more fixed-income products because these are rates we haven't seen in generations," said Jock Wright, an underwriter at Raymond James.
