Buy side

Reversing a five-week trend of outflows, tax-exempt money market funds gained $2.09 billion and finished the week ending Oct. 10 with $290.61 billion in total net assets, according to the Money Fund Report, a service of iMoneyNet.com.

Municipal bond yields ratcheted up more quickly the last three weeks than any other period in 2011. But instead of worrying the market, alienated investors are happy to see yields finally returning to attractive levels.

U.S. public finance downgrades at Fitch Ratings in the second quarter were at their highest level in eight years, according to a recent new report from the agency.

Municipal bonds are at some of their cheapest levels, relative to Treasuries, in market history. The problem is, most muni buyers don't care.

The municipal market will see about $1 billion less in new issuance this week after struggling to digest last week's supply as yields rose across the curve, forcing some issuers to stay on the sidelines until yields fall again.

The volatility and uncertainty in the bond markets have caught up with the behavior of municipal bond fund investors. As a result, muni mutual funds saw outflows after four straight weeks of inflows.

Muni yields plummeted in the wake of the Federal Reserve's Sept. 21 monetary policy meeting, prodding issuers to tap the capital markets. With back-to-back weeks of $8 billion in new supply, rates are now jumping back up.

Although outflows from tax-free money market funds dipped below $1 billion mark this week, they continued to put a damper on the industry as investors withdrew $773.1 million and total net assets fell to $288.52 billion in the week ended Oct. 3, according to the Money Fund Report, a service of iMoneyNet.com.

The municipal market can expect $8.26 billion of new issues this week, a slight increase from last week, despite rising yields across the curve.

Municipal bond mutual funds saw inflows for a fourth consecutive week, doubling last week's numbers.

The common talking point that municipal bonds are now driven by credit rather than rates seems a bit off the mark in a week like this.

Tax-exempt money market funds continued to suffer large outflows for a third straight week as investors withdrew $2.83 billion and total net assets fell to $289.29 billion in the week ended Sept. 26, according to the Money Fund Report, a service of iMoneyNet.com.

Yield and spread opportunities in the tax-exempt market in the first half of 2011 led banks to invest a larger portion of their assets in municipal securities compared to the same period last year, according to industry analysts and quarterly data provided by Highline Financial LLC.

Muni investors have herded into short-term debt the last few months thinking that if rates rise, longer-term bonds will plummet in value and it will be good to have cash on hand to reinvest at higher rates. But are short-term bonds really such a safe haven?

Plunging interest rates are luring more issuers to market, encouraging market participants to believe muni volume for the final months of 2011 can increase from recent anemic levels.

Eye-popping declines in muni yields on Thursday might finally prod investors into accepting low yields and prompt issuers to take advantage of some of the lowest borrowing costs in history.

Low new-issue volume and active early redemption of debt contributed to a decline in the amount of outstanding municipal debt in the second quarter to $2.89 trillion.

The summer doldrums are officially over, as issuance in the municipal market is expected to surge this week.

For the second straight week, and after six consecutive weeks of outflows, municipal bond mutual funds actually stayed positive.

The stability of the muni market was on display again this week, even as the risk of increased supply took hold of investor sentiment.