Withdrawals Accelerate, With Weekly Reporters Posting $397 Million Outflow

Withdrawals from municipal bond mutual funds accelerated last week as the financial crisis sapped demand for almost every investment except Treasuries.

Muni funds that post weekly reported a net outflow of $397 million for the week ended Nov. 19, AMG Data Services reported, compared with an outflow of $163 million the previous week.

The survey tracks muni bond funds managing a total of about $235 billion.

Retail clients took money out of muni funds for the ninth consecutive week after 27 straight weeks of net inflows, according to the Arcata, Calif.-based fund tracker.

"It's just the fear that's in the marketplace," said Dick Berry, a senior portfolio manager at Invesco AIM. "There's been a tremendous flight to Treasuries. ... It's just a panic mode."

During the seven days encompassed in last week's report, the Standard & Poor's 500 tumbled 5%, dragged down by banks and automakers. Oil plunged toward $50 a barrel and the VIX, or Chicago Board Options Exchange Volatility Index, sometimes known as the "Fear Index," hit 75, or almost double the rate after the Sept. 11, 2001, terrorist attacks.

The bloodletting represented a flight of capital from risky investments and into Treasuries. Yields on the 10-year Treasury note shrank to 3.39% from 3.82% during the seven days, on the way to historic lows.

Despite low default rates, municipal bonds have suffered in this flight to safety. While munis provide reliable income, Matt Fabian, managing director at Municipal Market Advisors, said munis are not liquid enough to attract safe-haven seekers the way Treasuries can.

"Munis simply can't provide the same benefit that Treasuries do," Fabian said. "Treasuries are the only legitimate source of safety and liquidity."

On Thursday, triple-A rated five-year municipal bonds yielded 144% of 10-year Treasury notes, the steepest discount in the nearly 30 years of data available at Municipal Market Data.

Still, withdrawals from muni bond funds have slowed considerably since October. Among all municipal bond mutual funds - including those that report monthly - net outflows have averaged $878.7 million a week for the last month. That is down sharply from an average $1.5 billion in net outflows for the four weeks ending Nov. 5.

Clients withdrew $4.5 billion from muni bond funds in the first three months of October. Those figures measure funds managing roughly $356 billion.

Robert Adler, president of AMG Data, said these outflows are mild, especially compared with the panicked selling last month.

Last week's withdrawals represent 0.17% of muni fund assets, compared with 0.91% for the week ended Oct. 15.

"The outflows may have picked up a little but they are on net very small," he said.

Taxable bond funds reporting weekly reported outflows of $5 billion for the week. Equity fund inflows were $3.5 billion for the week.

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