Do Investors’ Muni Sales Signal Beginning of a Wider Trend for Bonds?

Wednesday, 27 Mar 2013 08:48 AM

By Dan Weil

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Investors are starting to liquidate municipal bond positions, raising the question of whether the Great Rotation out of bonds has started.

Municipal bond funds have experienced an outflow of more than $500 million so far in March, according to Thomson Reuters. While that’s less than 1 percent of funds outstanding, it has confounded experts, CNBC reports.

Investors often sell munis during the spring to generate the cash they need to pay taxes. But this year’s selling came earlier than usual and thus appeared at least partially unrelated to normal seasonal activity.

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"Some observers have attributed the sharp outflows over the past few weeks to seasonal patterns, … but we disagree," George Friedlander, Citigroup's chief muni strategist, writes in a commentary obtained by CNBC.

"There is a real risk the negative pull of seasonality is yet to be felt."

So has the Great Rotation of money to stocks from bonds begun? Is the 32-year bull market for bonds over?

"It's really too early to tell, although the pattern does look like it's starting to gel," Chris Mauro, head of U.S. municipals strategy at RBC Capital Markets, tells CNBC.

"The equity market is doing extremely well, so you have a very enticing equity market and you have concerns of rising rates," Mauro notes. "In a rising-rate environment where you're going to have a limited potential for price appreciation, and maybe see negative prints on monthly statements, the soaring equity market looks pretty enticing."

To be sure, some experts see signs of stability for Treasurys. “The crosscurrents for risk are poor right now,” Aaron Kohli, an interest-rate strategist BNP Paribas in New York, tells Bloomberg.

“The Europe story is still not resolved. U.S. data have been mixed. It doesn’t impart a lot of direction.”

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