Muni Bond Exodus Continues

Chidem Kurdas

Money keeps flowing out of municipal debt, which has been hit by a double whammy.

Every week between $2 billion to almost $3 billion is leaving muni mutual funds, according to data from the Investment Company Institute.

While the Detroit bankruptcy filing on July 18th raised fears that this long staid market has become risky, that’s not the only issue causing investors to withdraw.

In the weeks following the bankruptcy announcement there was a spike in outflows. But there had been large withdrawals before that as well.

For instance, almost $7.7 billion left muni funds in the week ending June 26th, a time when Detroit’s financial troubles were well known but a formal bankruptcy process with potential losses to bondholders had not yet been set into motion.

The bankruptcy appears to be interacting with the anticipated tapering of the Federal Reserve’s bond purchases, which is having a massive dampening effect on the entire bond market including the muni segment. Thus in the week ending August 14th bond funds across the board had over $3.9 billion in outflows, with $2.086 billion of that coming from muni funds.

Meanwhile distressed securities investors are watching the prices of municipal debt fall, looking to buy those muni bonds that become available at a steep discount.

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