Muni Market Reverses Course as Investors Move In
NEW YORK (MainStreet) Something significant happened last week. The tax-free bond fund market reversed course. After a record run for the exits in 2013, with outflows of more than $64 billion, investors returned during the week ending January 15 with net inflows of over $103 million, according to Lipper.
It was the first week of net new money for the asset class in more than eight months -- since municipal bond funds saw net buy-ins during the week ending May 22 of last year.
The sell-off in tax-free bond funds was dramatic and prolonged in 2013. Lipper reports the Barclays Municipal Bond Index declined 2.55%. Most state municipal bond indices suffered even more. The Bank of America Merrill Lynch California Municipal Index fell more than 5%, while the New York Municipal Index declined 5.78%.
But as values plummeted, yields rose. The average SEC yield in the Lipper California Municipal Debt Funds classification, net of fees, was 3.20% as of December 31, 2013, compared to 2.27% a year earlier. The SEC yield of the New York Municipal Debt Funds was 3.08% versus 1.98%, while the Lipper General & Insured Municipal Debt Funds classification saw a yield of 2.87% compared to 1.86% on December 31, 2012.
"The allure of these increased tax-free yields -- the average SEC yield in the Lipper High Yield Municipal Debt Funds classification was 96 basis points higher at 4.36% at the end of 2013 compared to 3.40% at year end 2012 -- combined with the lack of any new surprises in the municipal finance space and concerns about the short-term valuations and prospects for both fixed income and equities could all have likely helped to contribute to the uptick in flows," writes senior research analyst Barry Fennell in a Lipper report.
Last year, the muni bond fund market was roiled with news of the Detroit bankruptcy as well as the continuing financial turmoil in Puerto Rico, a favorite for investors because of its higher yield and exemption from federal, state, and local taxes. Unfunded municipal employee pensions in Illinois and California also unnerved tax-free investors in 2013.
--Written by Hal M. Bundrick for MainStreet