Buy side

Puerto Rico's efforts to stave off a growing financial crisis could turn its bonds into junk-rated debt, BlackRock's municipal bonds group said Thursday.

The municipal market opened Thursday's session with slightly lower yields following news that the U.S. government proved capable of stepping away from the financial abyss.

Tax-exempt money market funds lost $973.2 million reducing total net assets to $264.92 billion in the week ended Oct. 14, as outflows resumed after the prior week's gain, according to The Money Fund Report, a service of iMoneyNet.com.

Bond insurers are poised to withstand the possible fallout from ratings downgrades or defaults on the industry's $16 billion of Puerto Rico bond exposure.

Intermediate-maturity munis sent a positive signal amid last week's market lethargy, as their prices stabilized at close to fair value relative to Treasuries.

As issuers prepare to bring more than $4 billion in long-term supply to the primary market this week, negative headlines regarding ongoing mutual fund outflows, as well as the impact of a weakening market for Puerto Rico’s debt and potential fallout from the debt-ceiling debate, continued to weigh on the municipal market.

For the 20th consecutive week, investors pulled money from municipal bond mutual funds, at $729 million for the week of Oct. 9.

Bond Buyer's Municipal Bond Index increased four basis points this week to the highest since Aug. 19.

Inflows of $2.74 billion to tax-exempt money market funds boosted total net assets to $265.90 billion in the week ended Oct. 7 and ended a three-week period of outflows, according to The Money Fund Report, a service of iMoneyNet.com.

The rally in stocks and slump in Treasury and municipal bonds this year has set the stage for a spate of tax-loss swaps in the remainder of 2013 that may increase muni selling.

In an effort to tap institutional investors' demand for information about Puerto Rico's tumbling debt, San Juan-based financial advisory firm REOF Capital LLC started a research division dedicated solely to municipal bonds issued by the commonwealth's key players.

Municipal analysts and strategists are looking in the health care and housing industries and at credits with intermediate maturities for potential bargains that may be created by irrational fears over the government shutdown and the debt ceiling.

Volume will continue to increase, though it will remain on the lighter side in the week after the U.S. government shut down.

The tax-exempt market was dominated in the past week by headlines concerning the government shutdown, the debt ceiling, Puerto Rico downgrades, and continued outflows from municipal bond funds, all creating a push-and-pull in the marketplace that left yields unchanged.

Muni bond mutual funds recorded their 19th straight week of outflows, at $690 million, as demand for tax-exempts stumbled.

Advisory firm Clark Capital Management Group created a new fund that uses munis to hedge against interest-rate risk and formed a partnership with longtime muni pro Jonathan Fiebach to run it.

The total net assets of tax-exempt money market funds dipped to $263.15 billion after $588.70 million of outflows in the week ended Sept. 30, the third consecutive decline, according to The Money Fund Report, a service of iMoneyNet.com.

Clark Capital Management Group, a family- and employee-owned investment advisory firm that manages $3 billion in assets, appointed Main Point Advisors, Inc. to sub-advise its new Navigator Duration Neutral Bond Fund.

The municipal market is prepared to withstand a congressional impasse over raising the debt ceiling this month as a U.S. credit downgrade that roiled the tax-free market during the 2011 debate is considered unlikely to recur this time around.

After the Fed decided not to taper its stimulus program, muni investors may want to grab an airbag, as the market faces likely volatility in interest rates, fund flows, potential issuance and municipal bond relative attractiveness.