Muni Bond Funds End Eight-Week Skid

Municipal bond mutual funds took in net new money (+$790 million) for the fund-flows week ended January 11, marking the first net inflows for the group since Donald Trump was elected to be the next president of the United States. During the eight-week slide muni bond funds saw their coffers shrink just over $17 billion. Interestingly, this mini-slump came almost directly on the heels of the group’s second longest streak of weekly net inflows ever (54 weeks), during which time it had positive net flows of $32.6 billion. Muni bond funds posted their third largest quarterly outflow ever (-$22.7 billion) for Q4 2016.

The driving factors behind this eight-week tailspin are tied directly to Trump’s election. Most municipal bonds are tax-exempt; therefore, they are a valuable holding for individuals in the top federal tax brackets. Trump’s tax plan (to reduce the top marginal tax rate from 39.6% to 33.0%) will lessen the value of the tax-exempt benefit provided by muni bonds. Another negative tied to the election for the group is the proposed infrastructure building. Muni bond issuance had reached a record high during Q4 2016, and if the campaign promise of rebuilding the nation’s infrastructure is kept, it will most likely lead to additional muni bond issuance. If an excess supply is created it could depress muni bond prices in the future.

The lion’s share of the negative flows during November and December came from funds in Thomson Reuters Lipper’s national municipal classifications. Funds in the Intermediate Muni Debt Funds category led the way with net outflows with $6.0 billion, followed by High Yield Muni Debt Funds (-$5.3 billion), General Muni Debt Funds (-$3.4 billion), and Short/Intermediate Muni Debt Funds (-$3.2 billion). At the individual fund level the largest net outflows could be attributed to two Vanguard funds: Vanguard Intermediate-Term Tax-Exempt Fund (-$2.3 billion) and Vanguard Limited-Term Tax-Exempt Fund (-$1.7 billion); they are in the Intermediate Muni Debt Funds and Short/Intermediate Muni Debt Funds classifications, respectively.

The net inflows this past week were almost completely due to the funds in the High Yield Muni Debt category (+$770 million). Within this group Nuveen High Yield Municipal Bond Fund (+$396 million) was responsible for over half the positive net flows.