Treasuries Rallied, Demand for Individual Munis Stabilized in May: BondDesk Report

Retail investors flooded into bond funds

A “flight to quality,” triggered by downbeat U.S. employment and housing data and the continuing Greek debt crisis, sent investors out of equities and into Treasuries in May, according a BondDesk Group Market Transparency Report released Tuesday.

Meanwhile, retail investors’ demand for individual municipal bonds began to stabilize in May, BondDesk said in a separate report.

Corporate Bond Activity

BondDesk’s report on retail trades of corporate bonds said that major stock indexes fell 3% to 4% in May, while Treasuries rallied significantly; yields on the 10-year bond fell to nearly 3%. Corporate yields did not fall as far or as fast, but still remained near their 12-month lows, resulting in tepid retail demand for individual bonds.

The report noted the discrepancy between high bond-fund inflows and the low trade volume for individual bonds. Retail investors poured some $21 billion into domestic taxable (corporate) bond funds, the most in the past eight months. “This discrepancy reinforces our view that the retail market for individual bonds is distinctly different from the retail market for bond funds,” the report said.

With rates at historic lows, the report said, the fact that so much money went into funds (the highest total in eight months) suggests that many investors are going to be unhappy when rates turn around.

Investors who bought individual bonds in May will experience a temporary paper loss when rates rise, the report said, but if they hold to maturity (and no defaults occur) they will receive the promised principal amount of their bonds. “BondDesk believes that investors who want fixed income exposure given today’s low rates should be looking at individual bonds rather than funds,” the report said.

Muni Bond Activity

Meredith WhitneyIn May, buying and selling volumes for individual municipal bonds were comparable to April levels, according to BondDesk’s report on retail trades of municipal bonds. It said the May figures were comparable to typical volumes before the recent crisis (triggered by comments by Meredith Whitney (left) on “60 Minutes”), suggesting the market is returning to “normal.”

During the first four weeks of May, municipal bond funds experienced net outflows of $137 million, a small fraction of the $3.7 billion outflows in April, but “it hardly reflects a bullish outlook,” the report said.

Retail investors in individual municipal bonds, by comparison, were overwhelmingly net buyers in May even though trading volumes was relatively light. Investors bought 2.4 bonds for every one bond they sold.

Municipal yields plummeted in May, mainly because Treasuries rallied, but are still above their 2010 average, the report said.

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