Municipal Bond Forum
Ignore the roller coaster
Q
Do you think, theoretically, that the muni market would be better off, or at least far less volatile, without muni mutual funds? Watching outflows from munis based solely on what amounts to an equity-market mechanism seems to negate much of the advantage of owning munis. Fund managers start selling to cover potential redemptions, and share prices fluctuate like a roller coaster, having nothing to do with the underlying assets.
A
James A. Klotz responds:
The cash flows in and out of muni mutual funds do not negate the advantage of owning muni bonds in any way, other than exaggerating the volatility in this $3.8 trillion market.
Traditional bond investors buy individual tax-free bonds for the income and high quality, after-tax returns unmatched by any other fixed-income investment. Because their bonds have a stated maturity and call date, they may find market fluctuations uncomfortable, but irrelevant.
In our experience, most veteran bond buyers welcome the higher yields triggered by muni fund redemptions. While bond fund outflows have averaged over $1.6 billion per week recently, individual bond purchases have outnumbered sales by more than 2.5 to 1.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.