Muni Bonds Offer Safe Haven Despite Whitney's Prediction

In a Municipal Market Transparency Report for BondDesk in June, Senior Market Strategist Chris Shayne wrote that the retail market for individual municipal bonds continued to stabilize during June. And, he said, the behavior among retail investors who buy individual muni bonds remains distinct from the retail investors who buy muni bond funds.

The ICI figure of $962 million is "still well below normal," Shayne wrote, noting that from January 2009 through October 2010, average inflows were $4.6 billion.

"Retail investors of individual muni bonds, by comparison, were overwhelmingly net buyers of muni bonds in June even though trading volume was relatively light," he wrote. "The June buy/sell ratio was 2.6 (up from May's 2.4), meaning that investors purchased 2.6 bonds for every 1 bond they sold. In June there were both more purchases and fewer sales than in May, which is why the ratio increased."

In a phone interview with AdvisorOne, Shayne (left) said that demand for individual retail municipal bonds is constant.

"Even in the worst and best of times, there is always a group of retail investors who want to buy individual bonds. They are generally wealthier people, and they're generally looking for the tax benefits of individual bonds," he said. "Even when yields are low, as they are right now, there's a core, and that core remains intact."

BondDesk reported that median yields of municipal bonds were relatively constant in June. They opened the month at 4.27% and ended at 4.32%, a 5 basis point gain.

"On the other side, you have the mutual fund investing community, which is all over the map and much more headline-driven," Shayne said. "They're much more sensitive to news and to market conditions. So you see quite a bit of volatility in their behaviors, which is why right now you're seeing modest inflows into mutual funds but not aggressive, whereas three months ago you were seeing aggressive outflows, and three months before that you were seeing aggressive inflows. You see quite a lot of volatility in terms of how mutual fund investors respond to their fixed-income portfolio holdings as opposed to the more static and stable holders of individual bonds."