The Investment Company Institute (ICI) reported yesterday that municipal bond funds saw inflows of $754 million for the time period September 14, 2016, to September 21, 2016, the 51st consecutive week of inflows. Although we won’t know until next Wednesday if the asset class will hit a full year of uninterrupted inflows, the strength of the streak is worth discussing.
As the chart below shows, the current streak is the second longest, and also the second strongest, in the past 10 years. The only one that has been longer started following the financial crisis in 2009 and persisted until March 2010, with an average weekly inflow of $1.35 billion. The current stretch has a slightly lower, but still strong, $1.2 billion in average weekly inflows. It is also interesting to note that some previous streaks would have been much longer, if not for a lone outflow in the middle. Had these not been broken, the current run would only be the fourth longest, though would remain the second strongest.
While uninterrupted stretches of inflows make for a nice headline, investors are more interested in what they mean for markets going forward. We reviewed all streaks that hit at least 20 weeks, and the results are shown below. The sample size is small, and there are certainly other drivers of performance such as demand for municipal bonds outside of mutual funds, supply (see last week’s Bond Market Perspectives, “Municipal Supply Surge”), and macro events. However, the general trend seems to show positive performance while the streak is happening, with some short-term weakness after (though the data unfortunately do not show an easy way to forecast when the streak will end). Following the end of a streak, the total return on the Barclays Municipal Bond Index was positive only 38% of the time, though returns were positive in all but one case (88% of the time) at the one-year mark.
Even rarer than streaks of inflows are stretches of more than 20 weeks of outflows. There have been only two since 2007, and both happened during periods of market disruption (following fears of an uptick in municipal bond defaults in 2011, and the taper tantrum in late 2013). However, both of these events were clear buying opportunities in hindsight, with total returns following the first inflow at an average of 3.7% three months later, and a very strong 10.3% one year later.
Fund flows measure just one way of purchasing mutual funds, but the length of the current streak of inflows, coupled with the large average weekly amount, shows that we have been in a period of very strong demand for municipal bonds. Retail demand is difficult to forecast and can see sudden reversals, but municipal bond demand has remained strong in recent weeks, making it possible that we see headlines about a full year of inflows when results are reported next week.
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
The Barclays U.S. Municipal Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
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