Investors kept pulling cash from municipal bond mutual funds at a record pace last week as frightened money continued to flee the market.
Muni mutual funds that post data weekly reported a $1.7 billion outflow for the week ended Jan. 5, according to Lipper FMI.
The exodus recorded its eighth consecutive week.
Among all funds, including those that report data monthly, outflows totaled $6.72 billion — by far the most severe withdrawals since Lipper started tracking this data almost 20 years ago.
Investors have yanked $23.3 billion from municipal bond mutual funds in the last eight weeks, reversing the previous eight months of inflows.
Funds reported an average of $3.45 billion of outflows per week the past four weeks, shattering the prior record.
Before the most recent cash redemptions, the record four-week moving average of outflows was $1.58 billion, in January 2000.
Tom Spalding, senior investment officer at Nuveen Investments, said he suspects that the first wave of outflows consisted primarily of investors trying to lock in gains on their bond funds as interest rates crept up.
"Then maybe it fed on itself as redemptions begat lower prices," he said.
Redemptions typically force fund managers to sell bonds to raise cash for investors. And the sales have certainly pushed prices lower. The Standard & Poor's index tracking total returns on municipal bonds is down 4.4% in the past three months.
Municipal bond mutual funds reported $2.03 billion in market losses on their holdings last week and have posted $21.6 billion in losses since the end of September.
Mutual fund redemptions continue to hamper municipal bond values despite minimal supply coming to market. Municipalities sold only about $400 million of bonds last week, according to The Bond Buyer and Ipreo data. State and local governments sold a combined $2.5 billion in the last two weeks of December, according to Bloomberg LP.
With such light supply, one might expect a rally, but yields have actually increased the past three weeks.
"Our market is very retail-driven," said Craig Brandon, a portfolio manager at Eaton Vance. "When retail sells bonds, or sells funds, that creates a demand for people to sell bonds and raise cash."
Between market losses and outflows, the muni fund industry has shrunk by $43 billion, or 8.2%, to $484.1 billion, since the beginning of the fourth quarter.
Many analysts agree that the incessant drumbeat of prognosticators foretelling widespread municipal insolvencies has taken a toll on demand.
"Many clients of ours are nervous about it, and I'm sure we're not the only ones," said Michael Brooks, who manages the $5.57 billion-asset Intermediate Diversified Portfolio at AllianceBernstein. "There's plenty of scared money left in the market. I think there's still going to be flows out because of all the headline risk."
In a report last week, Bank of America Merrill Lynch municipal strategist John Hallacy wrote that he worries about the stock market's momentum pulling money out of bonds.
Indeed, flow figures from the Investment Company Institute showed equity funds attracting money the past few weeks as bond funds coughed up mountains of cash.
