Massive capital shift! Investors are frantically buying U.S. municipal bonds, while U.S. stocks "bled" $20 billion in a single week
Investors' cash inflows into U.S. municipal bond funds have reached the highest level since 2007, with municipal bond mutual funds attracting approximately $2.4 billion in funds and ETFs recording $2 billion in inflows. Meanwhile, investors withdrew about $20 billion from U.S. equity funds. The Federal Reserve's interest rate cut expectations have driven municipal bonds up, with a return rate of 2.6% in September. Despite the strong performance of municipal bonds, future performance may slow down as bond issuance increases
According to Zhitong Finance APP, CreditSights stated that at the beginning of this month, cash inflows into U.S. municipal bond funds reached the highest level since at least 2007. Data from CreditSights shows that for the week ending September 10, municipal bond mutual funds attracted approximately $2.4 billion in funds, marking the highest level in 137 weeks; meanwhile, exchange-traded funds (ETFs) recorded an inflow of $2 billion, the highest level in four weeks. According to data from the Investment Company Institute (ICI), in the same week, investors withdrew about $20 billion from U.S. equity funds.
Driven by expectations of the Federal Reserve restarting interest rate cuts, investors are chasing the rise of U.S. state and local government bonds, and as stock prices rise to historical highs, they are rebalancing their portfolios.
Patrick Luby, Senior Municipal Strategist at CreditSights, stated, "In my view, this indicates that asset allocation is undergoing adjustments. I don't think there is much new money spontaneously flowing into mutual funds."
The S&P 500 index has reached an all-time high, with technology stocks rising due to interest rate cuts. Typically, lower interest rates stimulate consumer spending and increase corporate profits.
U.S. municipal bonds surged in September
The return on municipal bonds in September was 2.6%, surpassing U.S. investment-grade bonds and U.S. Treasury bonds. For most of this year, municipal bonds have underperformed these two asset classes. Record issuance of state and local government bonds, along with uncertainty regarding the status of tax-exempt bonds in President Donald Trump's tax and spending plan, has led to poor performance of municipal bonds.
Affected by a weak labor market report, municipal bonds rebounded strongly this month. However, as bond issuance increases and cash available for reinvestment decreases in October (a part of the seasonal cycle), the performance of municipal bonds may slow down. According to Bloomberg compiled data, approximately $16.3 billion in new bonds are expected to be issued in the next 30 days.
Mikhail Foux, Municipal Strategist at Barclays, wrote in a research report last Friday, "Tactical investors may tend to pause here or even consider taking profits, but we expect that if bond issuance does not see a significant unexpected increase, the market will continue to perform well in October."
