Retail buyers returning as default worries dim

Individual investors see fewer financial-default clouds hanging over US local and state governments and are steadily tiptoeing back to America's $3.7 trillion municipal bond market. Mutual funds specialising in munis had a fourth consecutive week of fresh investments by retail investors outpacing withdrawals, even as sales of new tax-free bonds pick up from early 2011's sluggish levels,
Muni mutual fund net inflows hit $141 million in the week ended November 2, according to data issued by Lipper on Thursday. The inflows were down from the nearly $310 million a week earlier but a four-week moving average remained positive at nearly $238 million, according to Thomson Reuters unit Lipper.
Chris Mauro, chief US munis strategist for RBC Capital Markets, said in a commentary that the inflows were showing a worrying deceleration in recent weeks he expected inflows at short-dated funds to continue. Individual investors are stepping up direct purchases of tax-free bonds, according to data from BondDesk Group LLC for the week ended Wednesday.
Retail investors bought 3.0 bonds for each one they sold during the week ended Wednesday, a buy/sell ratio that was up from the 2.8 to 1 calculated for the previous week. "The astounding value of municipals has brought the retail bid back despite the market pessimists," a muni market professional told survey takers at Municipal Market Data.
Normally a staid market with moderate price shifts, munis were rattled in late 2010 by predictions that many US governments were being overwhelmed by skyrocketing costs and plummeting revenues. But defaults have so far proven rare. And Standard & Poor's this week reported that municipal bond defaults in 2011 were running at a much slower rate than in 2009 and 2010.
Looking to next week, when the market will operate for four days because of a US holiday on November 11, sales of new munis were forecast by Thomson Reuters to fall to about $7.56 billion from an estimated $10.4 billion this week. In the comparable week in 2010, muni issuance was $11.2 billion, of which $4.2 billion was taxable Build America Bonds sold under a short-lived program that spurred a rush to market last year by states, cities and other sellers of munis.
Next week's negotiated sales were forecast to total $5.5 billion in 65 deals versus this week's estimated total of $8.53 billion in 82 deals. Competitively bid deals were forecast to total $2.06 billion in 95 sales next week versus $1.86 billion in 70 sales this week.
"Muni supply looks relatively manageable ahead of the long weekend and players may turn to crossover players for support as muni/Treasury ratios are elevated," MMD analysts Randy Smolik and Domenic Vonella said in a commentary. Secondary market trading of munis on Friday was slow, and, prices of top-rated muni bonds changed little and ended flat. Yields on 30-year munis finished up unchanged at 3.71 percent. The 10-year's yield also ended flat at 2.30 percent, according to MMD's scale of AAA-rated debt.