Muni Mutuals Taking Beating

The municipal bond, long thought to be one of the greatest safe-haven securities of all, is losing ground to riskier and higher-yield investments.

The muni mutual, the equivalent of a mutual fund for municipal bonds, isn't exactly the first thing most people think about when they think about bond investing.  But it was regarded as a pretty safe idea as far as investing went, and why not?  After all, if bonds are safe havens, then imagine how safe a DIVERSIFIED PORTFOLIO of bond issues would be.  But apparently, people are starting to look for ways to gain back ground in their heavily damaged portfolios of late, and are thus getting back into riskier ventures like stocks and bonds from emerging markets. 

Thus, the municipal fund industry is taking a beating as less capital is going into these issues than ever before.  To see just how bad the picture is, here's a bit of math.  The average weekly intake for the last four weeks was described as "the slowest pace since January 2009", with an average of 297.6 million dollars a week.  But last week, only 118.4 million dollars showed up.  The slowest pace since January of 2009, which was basically the start of the Grand Market Calamity, is cut almost two thirds?  I don't care HOW you figure it, that's a massive slowdown. 

But here's the REALLY strange part: the largest buyer of muni mutuals is the money market fund industry, who often needs secure capital on a regular basis, but not REALLY regular as investors in money markets commit their money for ninety days or more.  And they're still forking over the dough on a pretty regular basis.  So where's the loss coming from?

The answer there is most likely smaller investors, who are pulling out of the safe stuff and looking for a return to rebuild damaged portfolios.  This would mean that it's likely a good time to keep an eye on the stock market if you've got uncommitted savings you're looking to get a return on, but hedging your positions with puts or precious metals will probably be a good idea too.



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  • rypatel

    April 29, 2010

    I would be careful in thinking that a short term (weekly or even monthly) inflow number signals a meaningful trend.

    Sure, in April the inflow for muni bonds will be weak; however, the sector has enjoyed a consistent rate of inflows each and every month for almost 15 months in a row now. Taking a breather for one or two months should be expected.

    Even though there may be short term problems with muni-debt (state budgets, limited tax revenue), the long term picture is relatively clear: taxes in the U.S. will he higher, and as a result, muni demand will be higher.

    Also, investors don't seem to mind the looming interet rate risks out there, given that they've aggressivley been piling into taxable bonds since the start of 09'. Inflows were quite large in April too.

    I'm not saying that muni bonds are good investments now, or that stocks are better at these levels; however, I think it may be premature to call a trend in munis based on these numbers.

  • SteveAnderson

    April 30, 2010

    Ry--certainly not, but it is a suggestion of a long term trend, and these days, you've got to keep your eyes on every possibility.

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