UPDATE 1-U.S. municipal bond funds report ninth week of outflows

Thu Jul 25, 2013 5:45pm EDT

WASHINGTON, July 25 (Reuters) - Investors pulled money out of U.S. municipal bond funds for a ninth week in a row, according to data released by Lipper on Thursday that showed net outflows of $1.23 billion in the week ended July 24.

The results followed $1.56 billion in net outflows the previous week, which kept the four-week moving average negative at $1.22 billion, said Lipper, a unit of Thomson Reuters.

Municipal bond investors have been leaving the funds since late May over concerns that interest rates could soon rise and tempted by a run-up in equities. When Detroit filed for the largest municipal bankruptcy in U.S. history last week, investors were shaken again.

"To me it's not a sufficient enough reduction in outflows to suggest the worst is behind us," said Christopher Mier, chief strategist at Loop Capital, noting that "bad news" will continue to come out of Detroit for a while.

There were $231.71 million net outflows from high-yield funds, after $246.35 million outflows the previous week, as well. Exchange-traded funds also registered outflows, of $10 million, compared with $63.1 million the week before.

"That money is not going into equities," Mier said, adding that investors are moving into money markets or buying individual municipal bonds.

"The spot yields on muni bonds go up faster than the yields on a portfolio of muni bonds, and the rising rates create incentive. ... It's been a long time since we've been able to buy a bond with a 5 percent coupon at or near par."

Some of that strategy can be seen in data from BondDesk Group, which reported that retail investors bought 2.2 municipal bonds for every one they sold in the week ended July 24, the same as the week before. The number of bonds bought totaled 86,574, while the number of bonds sold was 39,947.

Six months ago, before the exodus from the funds, retail investors bough 1.7 bonds for each one they sold, and the total number bought was only 46,017.

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