Municipal bond trading data for June shows that the market has recovered since Meredith Whitney savaged munis on a “60 Minutes” segment late last year. Yet opinions vary on whether individual bonds or muni bond funds have come back the strongest.
Lipper reported that general municipal-debt funds in June saw more than $3.5 billion in net inflows. Bond funds compared well to the rest of the fund market, Lipper said in a June 30 fund flows release, noting that for the first month in five, investors were net redeemers of fund assets, withdrawing a net $41.8 billion from the conventional funds business, excluding exchange-traded funds.
A $43.1 billion outflow from money market funds and a $19.8 billion outflow from stock and mixed-equity funds swamped net inflows into bond funds, up $21.2 billion, their fifth month of net inflows, Lipper said.
“On the municipal bond funds side, general municipal debt funds (+$3.6 billion, May’s laggard) received the largest net inflows, while single-state municipal debt funds (-$61 million) witnessed the largest net redemptions,” Lipper reported.
Morningstar also reported a rise in municipal bond funds in June, though it came up with a different figure, $1 billion, versus Lipper’s general municipal-debt fund increase of $3.5 billion in net inflows.
“Flows into taxable-bond funds dropped by nearly $9 billion to $11.9 billion, but this drop owed mostly to high-yield outflows. Municipal-bond flows continued to turn the corner, registering nearly $1 billion in inflows,” Morningstar editorial director Kevin McDevitt wrote.
In contrast, BondDesk pointed to the Investment Company Institute’s (ICI) figures of $962 million in net inflows for municipal bond mutual funds during June, which was the first positive month since October 2010.
But while the three firms reported different muni fund flow numbers, all agreed that municipal bond fund sales are thriving. BondDesk, on the other hand, which bills itself as the nation’s largest retail bond trading venue, said that demand for muni funds lagged in June versus demand for individually sold municipal bonds.
In a Municipal Market Transparency Report for BondDesk in June, Senior Market Strategist Chris Shayne wrote that the retail market for individual municipal bonds continued to stabilize during June. And, he said, the behavior among retail investors who buy individual muni bonds remains distinct from the retail investors who buy muni bond funds.
The ICI figure of $962 million is “still well below normal,” Shayne wrote, noting that from January 2009 through October 2010, average inflows were $4.6 billion.
“Retail investors of individual muni bonds, by comparison, were overwhelmingly net buyers of muni bonds in June even though trading volume was relatively light,” he wrote. “The June buy/sell ratio was 2.6 (up from May’s 2.4), meaning that investors purchased 2.6 bonds for every 1 bond they sold. In June there were both more purchases and fewer sales than in May, which is why the ratio increased.”
In a phone interview with AdvisorOne, Shayne (left) said that demand for individual retail municipal bonds is constant.
“Even in the worst and best of times, there is always a group of retail investors who want to buy individual bonds. They are generally wealthier people, and they’re generally looking for the tax benefits of individual bonds,” he said. “Even when yields are low, as they are right now, there’s a core, and that core remains intact.”
BondDesk reported that median yields of municipal bonds were relatively constant in June. They opened the month at 4.27% and ended at 4.32%, a 5 basis point gain.
“On the other side, you have the mutual fund investing community, which is all over the map and much more headline-driven,” Shayne said. “They’re much more sensitive to news and to market conditions. So you see quite a bit of volatility in their behaviors, which is why right now you’re seeing modest inflows into mutual funds but not aggressive, whereas three months ago you were seeing aggressive outflows, and three months before that you were seeing aggressive inflows. You see quite a lot of volatility in terms of how mutual fund investors respond to their fixed-income portfolio holdings as opposed to the more static and stable holders of individual bonds.”