May 19, 2017

Lipper U.S. Weekly Fund Flows – Chart of the Week – As Tax Reform Stalls Investors Return to Municipal Bond Funds

by Patrick Keon

Municipal bond mutual funds took in net new money (+$3.0 billion) for the fund-flows week ended Wednesday, May 17—for a sixth straight week of net inflows. The week’s positive flows were the fifteenth net inflows in the last nineteen weeks (+$4.9 billion) for the group, following a run of eight consecutive weekly net outflows totaling over $17 billion.

That string of net outflows came directly after the election of Donald Trump as President of the United States. The outflows were tied to Trump’s campaign promises of tax reform and rebuilding the nation’s infrastructure. Most municipal bonds are tax-exempt; therefore, they are a valuable holding for individuals in the top federal tax brackets. Trump’s tax plan to reduce the top marginal tax rate from 39.6% to 35.0% would lessen the value of the tax-exempt benefit provided by muni bonds. Another negative for the group tied to the election was the proposed infrastructure building. Muni bond issuance had reached a record high during Q4 2016, and if the campaign promise of rebuilding the nation’s infrastructure were kept, it would most likely lead to additional muni bond issuance. Creation of an excess supply could depress muni bond prices in the future. But the Trump administration has not been able to move forward with tax reform or any of its pro-business economic agenda because it has become bogged down in a quagmire of political controversy.

The recent run of positive flows brought muni bond funds’ year-to-date increase to $8.5 billion. Funds in the national municipal bond categories were responsible for all of this net increase (+$9.4 billion), while funds in the single-state municipal bond classifications actually saw net outflows of approximately $900 million. Investors were drawn to the riskier assets; high-yield muni debt funds (+$3.8 billion) recorded the highest net inflows for the year to date. This increase was driven by Nuveen High Yield Municipal Bond Fund and Invesco High Yield Municipal Fund, which took in $1.6 billion and $642 million of net new money, respectively. Intermediate muni debt funds (+$2.2 billion) also contributed significantly to the year-to-date positive flows for the fund macro-group. The main contributors in the intermediate muni debt funds category were Vanguard Intermediate-Term Tax-Exempt Fund (+$1.9 billion) and JPMorgan Intermediate Tax Free Bond Fund (+$900 million). The lone single-state category making the list of the highest net inflows was the California intermediate municipal debt funds group (+$643 million). Vanguard California Intermediate-Term Tax-Exempt Fund (+$560 million) accounted for the lion’s share of the net inflows for that category.

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