Muni mutual funds see largest inflows since January 2023

Municipals were little changed as muni mutual funds saw $2 billion-plus of inflows, the largest positive flow figure in over two years. U.S. Treasuries cheapened and equities ended lower.

Investors added $2.332 billion to municipal bond mutual funds in the week ended Wednesday, following $107.8 million of outflows the prior week, according to LSEG Lipper data. This is the largest inflow figure since the week ending Jan. 25, 2023, when inflows totaled $2.9 billion.

High-yield funds saw inflows of $1.969 billion compared to outflows of $17.8 million the previous week.

Of the $2.332 billion inflow figure, $1.8 billion, or 78%, is driven by one high-yield, long-term ETF, according to J.P. Morgan.

Another factor of the massive inflows into mutual funds is parallel move to large inflows into the Capital Group Municipal High-Income ETF, which saw the biggest inflow of an ETF on Friday at $1.5 billion, said Pat Luby, head of municipal strategy at CreditSights.

“Perhaps it was an account or an advisor that has ETF and mutual fund clients and made a reallocation into high-yield and that moved money both in mutual funds and ETFs,” he said.

The two-year muni-UST ratio Thursday was at 59%, the five-year at 62%, the 10-year at 75% and the 30-year at 94%, according to Municipal Market Data’s 3 p.m. ET read. ICE Data Services had the two-year at 59%, the five-year at 63%, the 10-year at 74% and the 30-year at 95% at a 4 p.m. read.

“A subdued calendar is leading the way for the secondary market to provide rate direction,” said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.

“A steady tone up and down the curve hasn’t necessarily equated to softer volumes,” as Wednesday’s trade flows were at $9.5 billion and repeated Tuesday’s total, as August’s average daily volume has risen about 10% from the January to July period, she said.

Several things signal “fundamental strength” with technical caution ahead, Olsan said.

Muni money market balances have seen their lowest totals since mid-April in the latest week, falling to $135.8 billion, she said.

“Corresponding money fund vehicle yields, such as daily and weekly floaters, have settled in the 2.75% area, or more than 50 basis points above fixed coupon, one-year yields,” Olsan said.

Prospects for cash flowing out of money markets may depend on whether enough investors believe the Federal Reserve will cut rates next month, she said.

Offsetting that are September principal redemptions at an estimated $17 billion, three-quarters of the total being paid on Sept. 1, Olsan said, citing CreditSights data.

“That figure pales next to what can be expected to price in new issue,” she said. “Forthcoming supply has a few outlets: 1) managed program/individual buyers; 2) mutual funds/ETFs; 3) institutions (less active in income-oriented strategies than total return); 4) crossover buyers (i.e., arbitrage/hedge funds) and 5) dealers (who have been reticent to ratchet up carry).”

The market’s “staying power” at current levels will depend on the availability of exact structures or tailored approaches that maximize distribution, she said.

The September FOMC meeting further complicates direction, Olsan said, noting that since 2020, September averages losses of 1.30%.

There is a lot of pressure on the FOMC to make rate cut adjustments, as the recent consumer price index showed signs of softening, said Alice Cheng, director of municipal credit and investor strategy at Janney.

There has been discussion over the past several weeks whether the Fed would cut rates 25 or 50 basis points, and that changes day to day, she said.

Investors don’t need to “freak out” until an actual decision is made, Chen said.

“A lot of times, the market sort of front runs itself. I don’t believe that the overreaction or overthinking is the right choice. Instead, they should just patiently wait until the end of the summer, as we enter the [fourth] quarter, we will see if the rate cut happens,” Cheng said.

In the primary market Thursday, Barclays priced for the Montana Facility Finance Authority (//A+/) $111.46 million of revenue bonds (Benefis Health System Obligated Group). The first tranche, $61.46 million of Series 2025A, saw 5s of 2/2033 at 3.52%, 5s of 2035 at 3.86%, 5.5s of 2050 at 5.26% and 5.5s of 2055 at 5.31%, callable 2/15/2035.

The second tranche, $50 million of Series 2025B, saw 5s of 2/2065 with a tender date of 2/2030 at 3.09%, callable 8/15/2029.

In the competitive market, the Louisville/Jefferson County Metro Government Board of Water Works (Aaa/AAA//) sold $233.845 million of water system revenue bonds to BofA Securities, with 5s of 11/2026 at 2.27%, 5s of 2030 at 2.49%, 5s of 2035 at 3.38%, 4.25s of 2040 at 4.22% and 4.625s of 2045 at 4.65%, callable 11/15/2034.

More fund flows
Tax-exempt municipal money market funds saw inflows of $66 million for the week ending Aug. 19, bringing total assets to $136.864 billion, according to the Money Fund Report, a weekly publication of EPFR.

The average seven-day simple yield for all tax-free and municipal money-market funds rose to 2.29%.

Taxable money-fund assets saw $23.936 billion pulled, bringing the total to $6.989 trillion.

The average seven-day simple yield was at 3.98%.

The SIFMA Swap Index was at 2.78% on Wednesday compared to the previous week’s 2.80%.

CUSIP requests drop
In July, the aggregate total of identifier requests for new municipal securities — including municipal bonds, long-term and short-term notes, and commercial paper — fell 10.4% versus June totals.

On a year-over-year basis, overall municipal volumes were up 20.8% through the end of July.

Texas led state-level municipal request volume with a total of 247 new CUSIP requests in July, followed by New York (208) and California (93).

For the specific category of municipal bonds, there was a drop of 9.04% month-over-month, but these requests are still up 22.8% on a year-over-year basis.

AAA scales
MMD’s scale was unchanged: The one-year was at 2.20% and 2.22% in two years. The five-year was at 2.39%, the 10-year at 3.25% and the 30-year at 4.63% at 3 p.m.

The ICE AAA yield curve was cut up to two basis points: 2.24% (unch) in 2026 and 2.22% (unch) in 2027. The five-year was at 2.42% (unch), the 10-year was at 3.19% (+1) and the 30-year was at 4.63% (+2) at 4 p.m.

The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.20% in 2025 and 2.22% in 2026. The five-year was at 2.38%, the 10-year was at 3.25% and the 30-year yield was at 4.62% at 4 p.m.

Bloomberg BVAL was cut up to two basis points: 2.20% (unch) in 2025 and 2.22% (unch) in 2026. The five-year at 2.38% (+1), the 10-year at 3.22% (+1) and the 30-year at 4.62% (+2) at 4 p.m.

Treasuries were weaker.

The two-year UST was yielding 3.791% (+4), the three-year was at 3.744% (+4), the five-year at 3.858% (+5), the 10-year at 4.329% (+4), the 20-year at 4.903% (+3) and the 30-year at 4.924% (+3) near the close.