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October 16, 2020

Refinitiv Lipper Chart of the Week: Municipal Debt Funds Continue to Attract Investors

by Pat Keon, CFA.

Funds in Refinitiv Lipper’s municipal debt peer groups (including both mutual funds and ETFs) had net positive flows of $614 million for the fund-flows week ended Wednesday, October 14. This is the continuation of a long-term trend for tax-exempt bond funds as they’ve now taken in net new money in 22 of the last 23 weeks. This has resulted in the group growing their coffers by $43.5 billion since the end of the first quarter. As could be expected (and is illustrated in the chart below), the overall net inflows were dominated by funds in the national municipal groups (+$41.2 billion since the end of Q1) as opposed to those that limit their tax-exempt investments to just one state.

There are several reasons for the fund-flows rebound for muni debt funds since their COVID-19 induced slump in the first quarter. Muni debt funds suffered net outflows of $21.6 billion in Q1. First, in early April the Federal Reserve announced that it would begin buying up to $500 billion in short-term municipal debt in an effort to stabilize the market. This marked the first time that the Fed undertook a tax-exempt quantitative easing program.

The Fed’s program focused on the short-term muni market to try to support states and cities across the country that have been hampered by steep declines in revenue due to economic shutdowns forced by the coronavirus. As seen in the chart below, funds in the Short Muni Debt (average maturity less than three years) classification have had the largest total net inflows since the end of Q1. Also, as investors continue to search for yield, tax-exempt investments are currently providing more than comparable taxable options. For example, the yield on national AAA-rated 10-year muni bonds is currently 0.95%, while the yield on the benchmark 10-year Treasury note is 0.73%. These numbers equate to a municipal-to-Treasury yield (MT) ratio of 130.1%. The MT ratio is employed to determine which type of bond investment is more attractive at the moment and has historically been in the 80% range, so the current ratio is very favorable to munis. Lastly, muni debt funds are still a safe-haven asset. As the economy continues its bumpy recovery and COVID-19 is still not in the rearview mirror, there is still a lot of uncertainty, which is pushing investors toward safer investments.

Drilling down to the fund level, Refinitiv Lipper data shows that the net inflows have been widespread, with 12 funds taking in more than $1 billion in net new money since the end of the first quarter. Vanguard products accounted for four of the five-top net positive flows as Vanguard Intermediate-Term Tax-Exempt Fund, Vanguard Short-Term Tax-Exempt Fund, Vanguard Limited-Term Tax-Exempt Fund, and Vanguard Tax-Exempt Bond Index Fund grew their coffers by $3.8 billion, $3.4 billion, $2.7 billion, and $2.3 billion, respectively. JPMorgan Ultra-Short Municipal Fund completes the top five with a net intake of $2.4 billion.


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