Investor Demand Remains Strong for Municipal Bond Funds

Municipal debt funds (including both mutual funds and ETFs) took in $1.5 billion in net new money for the fund-flows week ended Wednesday, May 22. These results marked the group’s twentieth straight weekly net inflow (every week this year), during which time they’ve grown their coffers by $36.8 billion. Demand for muni bond funds during this streak has been intense, as net inflows have been greater than $1.0 billion in fifteen of the weeks. For comparative purposes, the last similar run of inflows for the group occurred between October 2015 and October 2016, when muni bond funds had net inflows in 54 consecutive weeks. But during this 54-week run, they only topped $1.0 billion in net new money eight times and their total take was $38.1 billion—just slightly more than the $36.8 billion for the year-to-date 2019. In fact, this year’s results to date would represent the third largest annual net inflow ever for the muni bond fund group.

Investors have flocked to muni debt funds, at least in part, due to changes in the tax laws. The U.S. Tax Cuts and Jobs Act put a cap on how much state and local taxes an individual can deduct from their federal taxes. This has caused investors to turn to muni bond funds in search of tax-exempt interest income to compensate for their higher federal taxes. Muni debt funds have also benefitted (as all fixed income funds have) from the Federal Reserve reversing its forecast on interest rate hikes for the foreseeable future.

Mutual funds (+$34.7 billion) have dominated the net inflows for muni bond funds and, breaking it down a little further, we find that the national municipal peer groups (+$31.4 billion) were responsible for the lion’s share of total net inflows as compared to the single-state muni classifications (+$5.4 billion). Within the national muni macro group, Intermediate Muni Debt Funds (+$12.1 billion), General Muni Debt Funds (+$10.3 billion), and High Yield Muni Debt Funds (+$8.2 billion) were the most attractive to investors. The largest individual net inflows among mutual funds belonged to Vanguard Intermediate-Term Tax-Exempt Fund (+$5.6 billion), Goldman Sachs Dynamic Municipal Income Fund (+$1.4 billion), and Nuveen High Yield Municipal Bond Fund (+$1.4 billion).