UPDATE 1-U.S. muni bond funds see smallest outflows in 5 weeks-Lipper

Thu Sep 19, 2013 5:21pm EDT

WASHINGTON, Sept 19 (Reuters) - U.S. municipal bond funds reported $1.1 billion of net outflows in the week ended Sept. 18, compared with $1.9 billion in outflows in the previous week, according to data released by Lipper on Thursday.

It was the smallest net outflow since Aug. 7, when investors pulled $93.77 million from bond funds.

Still, it was the 17th week in a row of withdrawals, and the four-week moving average remained negative at $1.5 billion, said Lipper, a unit of Thomson Reuters.

Investors eyeing gains in equities and nervous about Detroit's bankruptcy filing remain wary of tax-free debt and have steadily pulled more money from municipal bonds than they have invested since the week ended May 29. At the same time, Puerto Rico's shaky economy is hurting municipal bond funds, many of which buy the territory's debt that is free of federal and state taxation.

So far in 2013, municipal bond funds have only seen net weekly inflows in eleven weeks.

One of the major worries in the $3.7 trillion municipal bond market this summer - that the Federal Reserve will soon end its monetary stimulus program - eased somewhat this week after the central bank signaled it would continue purchasing bonds this year.

Yields on municipal bonds began falling late Wednesday and into Thursday, accompanying a price rise that could slow the hemorrhaging in bond funds even further next week. On Municipal Market Data's benchmark scale, yields on top-rated 10-year bonds fell 6 basis points to 2.61 percent and on highly rated 30-year bonds dropped 6 basis points to 4.23 percent on Thursday.

"The decision by the Fed to back away from its plans for tapering should make fixed income more attractive and we could see the recent rally extend to next week," said Daniel Berger, analyst at Municipal Market Data, a Thomson Reuters company. "Should this happen, fund outflows will abate and we should see them lessen and possibly turn into inflows within the next few weeks."

Funds that hold high-yield municipal bonds, which usually have lower credit ratings, posted $180.71 million of net inflows during the latest week. Net outflows a week earlier totaled $167.7 million, Lipper said.

However, investors in exchange-traded funds posted net outflows for the week of $134.11 million, compared with the $72.03 million investors withdrew on a net basis from funds in the previous week. The funds saw the largest outflows since June 26, when investors withdrew $158.12 million.

Buying interest for individual bonds dropped for the second week in a row, as well, according to data from BondDesk Group LLC. Retail investors bought 2.3 municipal bonds for every one they sold in the week ended Sept. 18, down from 2.4 during the previous week. The number of bonds bought totaled 87,102, while the number of bonds sold was 37,688.

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