RPT-UPDATE 1-U.S. municipal bond funds report $1.31 bln weekly outflows

Fri Sep 6, 2013 11:10am EDT

WASHINGTON, Sept 5 (Reuters) - Outflows from U.S. municipal bond funds continued to shrink, dropping to $1.31 billion in the week ended Sept. 4 from net outflows of $1.74 billion the week before, according to Lipper data released on Thursday.

However, it still marked the 15th consecutive week of net outflows, which kept the four-week moving average negative at $1.6 billion, said Lipper, a unit of Thomson Reuters.

High-yield funds saw outflows of $265.61 million and exchange-traded funds registered outflows of $60.88 million.

Fears of interest rate hikes and nervousness about credit risk have led to a mass exodus from municipal bond funds, with outflows reaching a record high of $4.53 billion at the end of June. So far in 2013, there have only been 11 weeks of inflows recorded.

Detroit, which filed for the largest U.S. municipal bankruptcy in July, has added to investors' concerns.

Puerto Rico's shaky credit quality is also weighing on municipal bond funds. Interest paid the territory's debt is exempt from states' taxes, which has made it attractive to individual investors and funds beyond its borders.

Bonds issued by Puerto Rico account for 13 percent of the John Hancock Massachusetts Tax-Free Income fund, for example, and those funds that bet heavily on high-yielding debt from the U.S. commonwealth are now struggling.

"Puerto Rico continues to lead all states and territories downward," S&P Dow Jones Indices said in a special commentary on Thursday. "Uncertainty about when and if the needed economic turnaround will come has put selling pressure on bonds in the secondary market."

The S&P National AMT-Free Municipal Bond Index that tracks investment-grade debt recorded a -1.71 percent return for August, it added.

The interest rate rise also shows no signs of abating.

On Thursday, yields for top-rated 10-year bonds rose 2 basis points on Municipal Market Data's benchmark scale to 3.04 percent, the highest since April 2011. Those for highly-rated 30-years also were up two basis points, to 4.51 percent, the highest since May 2011, according to MMD, a Thomson Reuters company.

Since the first trading day of the year, yields on top-shelf 10-years have risen 126 basis points and those on 30-years have are up 165 basis points. Yields move inversely to price.

Nonetheless, interest in purchasing individual bonds remains strong.

In the week ended Sept. 4, customers bought 2.7 bonds for every one they sold, up from 2.5 the previous week, although the number of trades was low.

The total number of bonds bought was 69,027, compared to the previous week's 94,889, and the total sales was 25,629, compared to 38,465 the week before, according to BondDesk Group LLC.