Mutual fund and ETF investors continue to plow net new money in tax-exempt bonds this year. For the Refinitiv Lipper fund-flows week ended November 17, 2021, investors injected $1.4 billion into municipal bond funds, for their thirty-seventh consecutive week of net inflows.
Despite the municipal bond fund macro-group reporting slight downside performance in seven of the last 10 weeks, concerns of a change in tax law to cover the United States’ ballooning federal deficit and proposed new spending packages by Congress has investors once again paying attention to after-tax returns. The days of tax-loss carryforwards from the financial crisis-era are long gone and every penny counts, especially with inflation rearing its ugly head and Uncle Sam likely to demand a bigger slice of our hard-won returns.
Year to date the average municipal bond fund has returned 1.54%, with returns in this asset class ranging from 0.08% for Short Municipal Bond Funds to 4.88% for High Yield Municipal Bond Funds. For comparison, the average taxable bond fund posted 0.36% return for the same period, with returns ranging from negative 5.08% for International Income Funds to 5.90% for Inflation Protected Bond Funds.
To be fair, that is a bit of an apples to oranges comparison. But with the yield curve steepening and then flattening over the last few months, we have seen General U.S. Treasury Funds take it on the chin, declining 4.28% YTD, while High Yield Funds (+4.42%) and Loan Participation Funds (+4.25%) have propped up the group average.
Despite concerns of rising interest rates (recall the inverse relationship between interest rates and bond prices), investors have plowed some $454.5 billion into taxable bond funds year to date, while injecting $329.7 billion into equity funds. (The average equity fund has returned 18.30% YTD.) However, many investors have become cautious with the continued rise in U.S. equities, particularly in face of rising input costs for companies, which even if inflation is transitory, could have an impact on earnings and thus stock prices.
Investors are keeping a keen eye on inflation, and for good reason. For October, the Consumer Price Index witnessed a year-over-year rise of 6.2%, posting an almost 31-year high, and eclipsing the Federal Reserve’s 2% target. However, many economists expect the CPI to slip in the coming months as supply-chain disruptions and surge in pent-up demand begin to normalize.
That said, municipal bond funds are on track to match or exceed the record inflows witnessed in 2019, when the group took in $96.5 billion for the year. Year to date, the macro-group has attracted $91.2 billion, with assets under management breaking through the $1 trillion mark for the first time in history in July. Estimated net flows into conventional municipal bond mutual funds still accounts for the lion’s share of net new money, attracting $73.5 billion YTD, while flows into municipal bond ETFs comprised just $17.7 billion.
The primary classifications drawing in investors’ assets in the municipal bond fund and ETF space were General and Insured Municipal Debt Funds (+$30.0 billion), High Yield Municipal Debt Funds (+$20.5 billion), Intermediate Municipal Debt Funds (+$16.2 billion), and Short-/Intermediate-Term Municipal Debt Funds (+$13.1 billion).
At a fund level, the primary attractor of investors’ assets in the municipal bond fund space YTD were Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, +$6.3 billion, including all share classes, warehoused in Lipper’s Intermediate Municipal Debt Funds classification), Vanguard Limited-Term Tax-Exempt Fund (VMLTX. +$5.7 billion, including all share classes, housed in Lipper’s Short/Intermediate Municipal Debt Funds classification), Vanguard Limited-Term Tax-Exempt ETF (VTEB, +$4.1 billion, including all share classes, housed in the General & Insured Municipal Debt Funds classification), and iShares National Muni Bond ETF (MUB, +$3.6 billion, also housed in Lipper’s General & Insured Municipal Debt Funds classification).
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