2013 has not shaped up to be the strongest year for municipal bond fund investors. After coming off their second strongest year for net inflows in 2012, concerns over some possible high profile defaults, namely Detroit, got enough attention for some investors to start paring back their exposure beginning in March. But this selling was quite mild and took place over periods where the average municipal bond fund was still providing positive gains. Hence, no real reason for investors to get too uncomfortable.
That quickly changed as the Federal Reserve pointed to stronger economic growth as a catalyst to start tapering the central bank’s asset-purchase program. This, in turn, helped lift Treasury rates to their highest level since 2011, quickly pushing many bond fund investors to the door. Although the selling was broad, the rate of selling from municipal bond funds was only outdone by the much riskier junk bond sector. In the chart below we show how ugly things have gotten over the past several weeks for munis as they look to post their largest monthly level of net outflows since the gloom and doom prognostications from Meredith Whitney back in December 2010.