Muni bonds: Fund flows are positive ... and negative

CHICAGO Fri May 20, 2011 3:33pm EDT

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CHICAGO (Reuters) - The U.S. municipal bond market received some good news and bad news this week concerning flows into muni bond funds.

By the Investment Company Institute's accounting, net inflows of $38 million broke a 26-week streak of net outflows. But Lipper late on Thursday reported that net outflows continued for a 27th consecutive week, climbing to $108 million from $94.5 million in the previous week.

"I'm fairly confused. It's hard to tell exactly what's going on," Chris Mier, a market strategist at Loop Capital Markets in Chicago, said on Friday.

He noted there is overall confusion in the $2.9 trillion muni market where states, cities, schools and others sell debt as supply has sunk to an 11-year low and retail investors have been bombarded by headlines on financial woes, predictions of massive bond defaults, and proposals in Congress to end tax exemption.

Still, Mier said it would make sense at this point for fund flows to revert to positive as prices have ratcheted higher, pushing yields on top-rated 10-year muni bonds down 82 basis points on Municipal Market Data's scale since January 18.

"I think, clearly, retail is getting more comfortable in munis," he said.

Retail buyers, who make up the bulk of the market's investors, may be seeking individual names to buy and getting reassurance from their brokers that the muni world is not about to end, Mier said. That contrasts with muni mutual funds, where support for investment decisions is thinner.

Meanwhile, supply in the coming week is expected to slip to $3.4 billion from about $4.9 billion this week. For details, click on [nN20470004].

Massachusetts got an early start by launching a retail presale for its $490 million of general obligation bonds on Friday. Yields topped out at 3.64 percent for bonds due in 2025 with a 3.50 percent coupon.

Muni prices, which fell on Thursday for the first time since April 12, were mostly steady on Friday, leaving yields on top-rated 10-year bonds at 2.64 percent and 30-year yields at 4.31 percent, according to MMD.

(Reporting by Karen Pierog; Editing by Leslie Adler)

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