UPDATE 1-U.S. high-yield muni bond funds lead inflows

Thu Feb 13, 2014 5:59pm EST

Feb 13 (Reuters) - High-yield U.S. municipal bond funds attracted new cash for a fifth straight week even as major U.S. credit rating agencies downgraded Puerto Rico to junk status, data released on Thursday showed.

High-yield funds took in $161.2 million in the week ended Feb. 12, beating a $96.1 million inflow seen the prior week, according to Lipper, a unit of Thomson Reuters. Investment-grade municipal bond funds reported an $82.1 million inflow after suffering a $227.3 million outflow the prior week.

The demand for high-yield munis comes at a time when the market faces a potentially precedent-setting bankruptcy case in Detroit and uncertainty about Puerto Rico, which has some $70 billion in debt and could face nearly $1 billion in accelerated payments on interest rate contracts after the downgrades.

Demand for discount Puerto Rico bonds could account for some of the inflows. OppenheimerFunds recently ramped up its holding of Puerto Rico debt in some of its municipal bond funds. [ID: nL5N0LH4JO]

"Some of these bonds trade at 9 or 10 percent yields and 60 cents on the dollar," said Barry HoAire, a portfolio manager at Bel Air Investments "Some you can buy cheaper than Argentinian or Greek debt."

Puerto Rico bonds are popular among U.S. investors because it is tax free in all 50 states

Investors may also be taking advantage of good buys on other high-yield bonds that have suffered unfairly because of concern over Puerto Rico.

"I think some people are thinking that once we get Puerto Rico and Detroit behind us, a lot of these lower-rated credits could catch a bid," HoAire said.