UPDATE 1-US muni funds see $172 mln weekly outflows -Lipper

Thu Jun 16, 2011 5:23pm EDT

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By Chip Barnett

NEW YORK, June 16 (Reuters) - U.S. municipal bond funds posted $172 million of net outflows in the week ended June 15, according to Lipper data issued on Thursday.

In the previous week, muni funds had inflows of about $274 million, in a buying spree that broke 29 straight weeks of outflows.

But with the latest data, the four-week moving average stayed negative, remaining about $157 million in the red after a decline of around $141 million in the previous week. The average has been negative for 31 weeks. The last time the four-week average was positive was in the week ended Nov. 10, 2010.

Individuals dominate the $2.9 trillion municipal bond market, but the long pattern of outflows has puzzled experts who first attributed the outflows to fears about the shaky state of government finances and forecasts of a coming avalanche of municipal bond defaults and possible bankruptcies.

Since then, however, tax revenue has rebounded for many states, counties, cities and towns, easing fears that the historically low default rate of under 1 percent might spike higher.

Josh Gonze, a portfolio manager with Thornburg Investment Management in Santa Fe, New Mexico, said: "There's plenty of demand for bonds even if we see those negative flows from Lipper." Gonze, who helps manage $7 billion of tax-free assets, said investors might be opting for higher-yielding assets, such as dividend-paying stocks, or perhaps choosing to buy municipal bonds directly, instead of through mutual funds.

Municipal "bonds remain very expensive," he said, noting that the yield on a 10-year top-rated tax-free bond is quite low at around 2.65 percent.

Also in the week ended June 15, Lipper said that municipal Exchange Traded Funds (ETFs) lost about $280,000, breaking five straight weeks of inflows.

However, high-yield muni funds reported inflows of $38.6 million after seeing inflows of $80.6 million in the previous week, according to Lipper. This also suggests that higher-yielding investments are in favor.

On Wednesday, the Investment Company Institute said muni bond funds stayed positive for the fourth week in a row as investors put $298 million of new cash into them in the week ended June 8.

Meanwhile, tax-free money market assets fell $1.84 billion to $307.71 billion in the week ended June 14, according to the Money Fund Report, published on Wednesday by iMoneyNet. (Additional reporting by Joan Gralla, Daniel Bases, and Angela Moon; Editing by Leslie Adler)

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