Municipal bond funds saw their worst outflows ever in 2013.
Fears over rising interest rates and the dire credit environment for Detroit and Puerto Rico combined to create 22-straight weeks of redemptions, totaling $US58 billion.
“It’s the worst period in my 25-year career,” Tom Metzold of Eaton Vance Management told Investment News’ Jason Kephart.
But Bloomberg’s Michelle Kaske reports the run may be at an end: the discount-to-asset-value of the largest exchange-traded fund tracking muni bonds has narrowed to July lows of 0.03%, compared with a gap of 2.86% in June.
“The shift suggests that buyers will return to local debt in the next few months, said Bart Mosley, co-president of Trident Municipal Research in New York.
“At least it means that those outflows will subside,” Mosley said. “The narrowing or the elimination of a discount on ETF products reflects the renewed comfort of investors with fixed-income generally.”
The Fed has now repeatedly signaled it wants to hold interest rates at bay. And while there remains some uncertainty over the target and extent of haircuts in Detroit, investors seem to be taking a wait-and-see approach toward Puerto Rico, whose just above investment-grade rating S&P confirmed last week.
“The market still has some long-term concerns about Puerto Rico, but there’s not a near-term event which might lead to some re-pricing of Puerto Rico debt,” BlackRock’s Matthew Tucker told Kaske.
Puerto Rico’s El Nuevo Dia reported last week that Puerto Rican officials met with heads of major financial and industrial firms in New York to reassure them that fiscal reforms designed to reduce the country’s large deficit are on track.