Data hints small investors eyeing muni market rally

MIAMI Fri May 13, 2011 3:56pm EDT

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MIAMI (Reuters) - Outflows at U.S. tax-free mutual funds may have crested, signaling that small investors are possibly warming to America's municipal market, now in a month-old rally.

Mutual funds data group Lipper late on Thursday reported that funds specializing in U.S. muni debt had nearly $95 million of net outflows in the week ended May 11, marking the 26th straight week of outflows.

But the total was less than an eighth of the previous week's outflows of over $796 million, according to Lipper, a unit of Thomson Reuters.

The four-week moving average of muni fund outflows also narrowed.

High-yield muni funds tracked by Lipper reported almost $72 million of net inflows, reversing the previous week's $51 million of outflows. The last time these funds saw net inflows was in the week ended April 30, with net inflows of $25 million.

"Significantly, some of the individual fund families actually reported modest inflows in the past week," said Chris Mauro, RBC Capital Markets' munis research director. "This confirms some anecdotal information we had been hearing from customers over the last few days and is consistent with the relatively moderate level of municipal bid wanteds posted in the last several trading sessions."

Institutional investors and traders have reported in recent weeks that worries about the finances of state governments and other issuers had eased among wealthy investors, who had grown weary of low returns on cash holdings.

In active secondary trading on Friday, prices continued climbing and rose enough to trim yields by as much as 3 basis points, according to Municipal Market Data's reading of AAA-rated munis.

Yields on 10-year bonds declined 2 basis points to 2.64 percent. On April 11, the 10-year yielded 3.27 percent. or 63 basis points more. Thirty-year yields also eased 2 basis points to 4.37 percent, according to MMD, which is part of Thomson Reuters.

Munis on Friday were helped by a rally in U.S. Treasuries that had been helped by a Wall Street equities sell-off and have been lifted by unusually light supplies of new bonds coming to the $2.9 trillion market.

Primary offerings next week will inch down slightly to $4.9 billion, after rising this week to about $5 billion, according to forecasts by Thomson Reuters.

Volume this year is running far below 2010's pace. In the same week last year, total muni bond issuance was around $9.2 billion, which included about $1.9 billion of taxable Build America Bonds. Supply is at an 11-year low so far in 2011.

(Additional reporting by Joan Gralla and Caryn Trokie in New York; Editing by Leslie Adler)

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