Positive Finish For Munis
- Friday, 03/23/2012
- Demand is rising
- ETFs are driver of muni fund flows
- Muni ETFs are gaining traction
After suffering under the recent pressure of significant new-issue supply, the muni market recovered its footing and ended this week with a positive finish. Demand is being driven by arbitrageurs ("arbs"), who are attracted to the intermediate part of the yield curve, where the ratio of high-grade muni to Treasury yields is above 110%. Near term, muni new-issue supply is expected to ebb somewhat, which should help to support prices heading into the Easter/Passover break.
One set of "enhanced" data has caught my eye. It comes from J.P. Morgan (JPM), which, as far as I know, is the first dealer to refine its flow-of-funds reporting to show contributions from exchange-traded funds (ETFs). Significantly, JPM now assigns ETFs their own category, whereas in the past, ETFs were grouped with muni bond mutual funds. For the week of 3/21/12, JPM reported that all municipal bond funds had a net inflow of $88 million and "approximately 50% ($44mn) was from ETFs."
This is significant data because it confirms our observation that muni ETFs are continuing to gain traction with investors and financial advisors. It also may indicate a gradual shift in investment preference, from actively managed muni bond funds into indexed, exchange-traded ETFs. MUNI NATION will keep an eye on this data and help you interpret the demand trend.