Mutual fund inflow growth swayed by Fed cuts
3 min read
Investors have been pumping larger amounts of cash into muni mutual funds over the past several weeks due to positive returns for the asset class and some clarity from the first Federal Reserve rate cut, with some market participants believing a larger inflow cycle is only beginning.
Mutual funds saw inflows to the tune of
The Investment Company Institute reported $1.312 billion of inflows into mutual funds for the week ending Sept. 25, bringing year-to-date fund flows to $23.946 billion.
Fund flows are now positive “given a cheaper ratio backdrop and as the long-duration play endures in response to an uninverted and steepening yield curve and a move to lock in attractive cash flows,” said Jeff Lipton, a research analyst and market strategist.
These inflows come on the heels of two years of outflows.
LSEG Lipper reported outflows of $66.65 billion in 2022, while ICI reported outflows of $145.16 billion.
Outflows continued in 2023, though to a lesser extent, with LSEG Lipper reporting investors pulled of $8.6 billion while ICI reported outflows of $21 billion.
Kevin Ng
Fund flows have been at the top of market participants’ minds, as some wonder where there are enough inflows to deal with outsized supply, said Jennifer Johnston, director of municipal bonds research at Franklin Templeton.
Fortunately, mutual funds have been “gaining” flows for a while, allowing deals to be better absorbed due to money coming into the market, she said.
“Hopefully, we start to see even more flows come in,” Johnston noted.
“Fund inflows have been keeping the market going,” said David Litvack, a tax-exempt strategist at BofA Securities, noting there has been “strong” retail demand from mutual funds and exchange-traded funds.
Week after week of inflows have contributed to the richening of munis over the last few weeks despite “torrid” issuance, he said.
Furthermore, the recent inflow cycle can be attributed to market participants chasing returns.
“People wait for positive returns,” said Jeff Timlin, a partner at Sage Advisory. “When you see negative returns, shortly after that you see significant muni outflows; when you see multiple periods of positive returns, that’s confirmation the market has turned around, then you see positive inflows.”
While munis are seeing losses of 0.20% month-to-date, the asset class has seen gains for several months, with year-to-date returns at 2.09%.
The combination of the “onerous net supply scenario” and highest base yields over this full Fed easing cycle will lead to a significant inflow cycle, said Peter DeGroot, managing director and head of the investment bank’s municipal research and strategy team at J.P. Morgan, in a
“We’re on the precipice of a protracted easing cycle that the Fed kicked off with that 50 basis point cut and at least historically speaking, that has led to inflows,” he said.
“Fed easing campaigns have historically triggered positive fund flow cycles, and so sidelined cash is finding its way back into the muni market,” Lipton said.
Since 1992, all six easing cycles have led to inflows into mutual funds, according to DeGroot.
“Easing cycles that were reversed in relative short order such as in 1992, 1995, and 1998, saw relatively low inflows as a proportion of AUM at 13%, while periods where the funds rate held lower for longer (2007, 2019) saw higher average inflows as a proportion of AUM at 25%,” J.P. Morgan strategists, led by DeGroot, said a Sept. 20 report.
The inflow cycle, though, is now in its early stages, J.P. Morgan strategists said.
“Even after [Friday’s] jobs report and expected slower paced and more protracted easing cycle, we continue to look for a 3% terminal rate in 2025,” they said in a Friday report. “Note, historically, longer easing cycles have resulted in a more protracted period of municipal bond fund inflows.”
