The municipal universe continues to shrug off the panic enveloping financial markets across the world.
Investors entrusted $536.3 million to municipal bond mutual funds during the week ended May 19, according to Lipper FMI, a clear uptick from the recent trend.
Funds enjoyed $611 million in market gains during the week as the yield on the benchmark triple-A rated 10-year municipal bond dipped seven basis points, according to Thomson Reuters.
The municipal fund industry lately has commanded new cash in virtually every category, including high-yield and long-term funds. The sector has grown 6.6% this year to $495 billion in assets, an all-time high. Funds have taken in an average of $388 million a week for the past four weeks, the strongest pace of inflows in a month and a half.
All this while most of the world is selling everything with any taint of risk. The Standard & Poor’s 500 index is down 7.6% in the past seven trading sessions and down 8.8% for the month.
The VIX — a measure of market volatility calculated by the Chicago Board Options Exchange — skyrocketed to more than 46 at one point last week. That was the highest reading on the “fear index” since March 2009. Oil plunged below $70 a barrel. Gold hovered above $1,200 per ounce. The yield on the 10-year Treasury note collapsed to 3.2%.
In his weekly report, EPFR Global analyst Cameron Brandt wrote that markets remained jittery as people lost hope that the rescue package for Greece and other troubled European countries would be enough.
Flows for the week “reflected the uncertainty and heightened risk aversion,” he said.
“Flows into bond funds continued to reflect the diminished risk appetite of investors and their fears about the sovereign debt of peripheral Eurozone countries,” Brandt wrote. He noted outflows from taxable high-yield bond funds and most types of equity funds. “U.S. bond funds benefited from a shift to safety,” he said.
This illustrates that despite outcry over public pensions and hand-wringing over municipal credit quality, state and local government debt continues to benefit from a perception that it offers a relatively safe perch.
“I think munis are viewed as a domestic safe haven and perhaps more importantly a tax haven,” said Alan Schankel, director of fixed-income research at Janney Montgomery Scott.
This offers the sector some insulation against the flights from risk that plague many other industries, he said.
Municipals have historically moved in tandem with Treasuries. Treasuries have rallied sharply, shaving 45 basis points off the 10-year yield this month. The 10-year municipal yield, based on the MMD scale, is down only 11 basis points. That has rendered municipals fairly cheap compared with Treasuries, Schankel said.
The 10-year triple-A municipal yield, based on the Municipal Market Advisors scale, is currently 92% of the 10-year Treasury yield. In the past year, it has averaged 88%.
Schankel said sometimes when Treasuries rally, munis rally at a lag and eventually catch up. He expects a reversion in the ratio at some point.
