Individual investors pulled cash from municipal bond mutual funds for the 29th straight week, according to Lipper FMI. While the rate of withdrawals appeared to be slowing in early May, the pace has picked up again since then.

Individual investors are still reallocating their assets and reaching for yield outside of the muni market, according to one industry analyst.

There were $436 million in net outflows from municipal bond funds that report their flows weekly for the week ended June 1, according to Lipper, a pace not seen in a month. The previous week, investors withdrew $296 million.

Investment Company Institute numbers have reported positive inflows, but not by much. It reported muni bond funds saw $37 million in inflows for the week ending May 25. That’s down from the $63 million of inflows the ICI reported the previous week.

One reason why fund flows continue to be negative is that individual investors are hunting for yield, Chris Mauro, a research analyst at RBC Capital Markets, wrote in a note on muni fund flows. Individual investors are putting their money into equity funds, which took in $958 million, and taxable fixed-income funds, which saw $2.4 billion in inflows, he added.

After four weeks of inflows, high-yield muni funds that report weekly saw outflows of $43.5 million, Lipper numbers show.

Mauro noted that because the Lipper reporting period ended on June 1, it didn’t account for the $40 billion of coupon payments and principal redemptions scheduled for this month.

“We anticipate that these payments will be reflected in the coming weeks’ flow reports in the form of reinvestment which should, finally, put municipal bond mutual fund flows into the black,” Mauro wrote.

Investors flocked to muni bond funds in 2009 and the great majority of 2010. But flows reversed during the week of Nov. 17, Lipper numbers show. On Nov. 11, Standard & Poor’s downgraded roughly $22 billion of junk-rated tobacco bonds, and some muni investors saw that as a signal to sell.

The news was followed by negative headlines associated with the municipal market, including predictions of bond defaults. For the week ended Jan. 19, investors in funds that report their flows weekly pulled more than $4 billion, Lipper reported.

Dan Loughran, who leads the Oppenheimer Rochester municipal investment team as a senior vice president and senior portfolio manager of OppenheimerFunds Inc., said retail investors are becoming comfortable again with the muni market as the pervasive credit fears have gradually subsided.

“One reason those credit fears are abating is the fact that the widespread systematic defaults aren’t happening,” Loughran said. “And what we’re seeing is governments, both on the state and local level, taking steps necessary to improve credit quality.”

Assets for funds that report their flows weekly ticked up to $317 billion from $316 billion the previous two weeks. The value of the holdings for weekly reporting funds climbed by $1.2 billion. This is a large jump from the $172 million it rose by last week, and was more in line with the increases of at least $1.6 billion that weekly reporting funds saw in the weeks dating back to April 20. Prices for muni bonds started the past week steady, but firmed across the curve on Wednesday. This week also marked the ninth in a row that net-asset values gained.

Among all municipal bond mutual funds that report their flows weekly, the four-week moving average dropped to a $233.6 million outflow from a $323.7 million outflow the week before.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.