Reading the Flows
- Thursday, 05/16/2013
Last week, several reporting sources for fund flows recorded a change in course. Cash flowing into municipal bond funds in aggregate recorded the first positive week in the past two months. The monthly numbers are still negative but I believe the turn may signal that the recent swoon is over.This event does not make a trend but I believe it has ended one. So what might the reasons be for an improved outlook?
May and June are estimated to deliver more than $60 billion in rollover cash in the form of maturing bonds and calls1.Despite the strong performance recently enjoyed by the equity markets, there is no universal consensus that the recovery is in full throttle, leaving advisors a little cautious about asset allocation decisions. If they opt for municipal bonds it will be because the metrics of low volatility, low correlation and taxable equivalent yields have continued to call attention to the asset class.
The combination of tax-payment-day selling and increased new issuance supply, in some cases, has provided attractive price points for investors seeking tax-free income. Further evidence of this can be seen in the recent average discounts emerging for municipal bond closed-end funds and ETFs: -1.12% and -0.05%, respectively (see premium/discount chart). The discounted market price relative to the underlying valuation of the portfolios, in my opinion, presents a potential opportunity to achieve total return should market pricing return to positive territory, where it remained for much of 2012.
Monthly Average Premium/Discount2
Additionally, the fact that municipal ETF flows have not followed the same pattern as municipal mutual fund flows is interesting to me. With ETFs trading at a slight discount with little or no outflows, any positive turn in demand could push ETFs to a premium, thus generating positive total returns (see fund flows chart below).
Muni ETF Flows Modestly Positive Every Month YTD2
1 Source: Citi Research, Municipal Market Comment 5/3/13.
2 Source: Morningstar as of 4/30/13.