UPDATE 2-U.S. municipal bond funds post another week of inflows -Lipper

Thu Aug 7, 2014 6:21pm EDT

(Adds corporate high-yield comparison, municipal yields, paragraphs 5-9)

By Lisa Lambert

WASHINGTON Aug 7 (Reuters) - Demand for U.S. municipal bonds has remained strong throughout the summer, a key investment season, with municipal bond funds posting $16.6 million in net inflows for the week ended Aug. 6, according to Lipper data.

That followed net inflows of $418.6 million and $686.2 million the previous two weeks and brought the four-week moving average to inflows of $319.8 million, according to Lipper, a Thomson Reuters company.

Municipal bond investors typically put coupon and principal payments in their bonds made in the summer back into the market. The reinvestment season, along with low supply, has helped keep demand strong, said Anthony Valeri, fixed income and investment strategist at LPL Financial.

Investor money has washed into municipal bond funds for 25 out of 32 weeks this year, and for the year to date there have been $11.1 billion in net inflows. In comparison, the funds saw a record outflow in 2013 of $64.2 billion - and only 11 weeks of inflows over the course of the whole year.

Much of the demand is for high-yield bonds, riskier debt that comes with rich yields. While investors have fled lower-rated corporate debt - high-yield corporate bond funds saw record outflows of $7.068 billion for the week - they have hunted for yield among weaker municipal credits.

In the week ended Aug. 6, high-yield funds saw $60.3 million net inflows, after $227.2 million inflows the previous week. So far this year, high-yield funds have only registered three weeks of outflows.

"Municipal bond outperformance has led many investors to continue to move down the credit scale in search of yield, causing the difference between yields on lower quality bonds and high quality bonds to narrow," wrote Dorian Jamison, a municipal analyst for Wells Fargo Advisors.

Yields for highly rated debt are falling on Municipal Market Data's benchmark scale. On Aug. 6, the yield for a top-rated 10-year bond was 2.22 percent and for a top-shelf 30-year was 3.25 percent, both 13 basis points lower than a month earlier.

Meanwhile, the yield on a 10-year bond rated BAA was 3.41 percent and on a lower-rated 30-year bond was 4.36 percent, according to MMD, a unit of Thomson Reuters.

Through the end of July, Bank of America Merrill Lynch's master municipal index had a total return of 6.778 percent for 2014. Its high-yield index notched a total return of 7.028 percent. Both beat the total return of its corporate bond index, 5.82 percent.

Exchange-traded funds have also captured investor interest this year. According to Lipper, the funds had $22.6 million net inflows in the week ended Aug. 6, after $96.6 million net inflows the previous week. (Reporting By Lisa Lambert; Editing by Grant McCool)