$49 Billion Later, Muni’s See 1st Inflow Post Whitney Scare

Municipal bond funds had their first weekly inflow since Meredith Whitney’s infamous December appearance on “60 Minutes,” where the analyst predicted that up to 100 muni bond defaults would cost investors in this traditionally conservative marketplace billions.

Meredith Whitney on Closing Bell
Meredith Whitney on Closing Bell

Investors put $246 million into tax-exempt bond funds during the week ended June 8th, breaking a 29-week outflow streak that totaled a whopping $49 billion, according to data from Lipper, a Thomson Reuters unit. Assets in municipal bond funds, excluding ETFs, were $468 billion at the end of May compared to $520.7 billion at the end of October last year.

“While one week hardly makes for a trend, it’s worth nothing that muni funds have been outperforming the broad market year-to-date,” said Daniel Fannon, an analyst for Jefferies, in a note.

The asset class may be regaining its status as a stable, income-generating group after the Dow Jones Industrial Average fell back below 12,000 this week and as state and municipal tax revenues seem to be coming in better than feared.

“Local governments are actually in better shape because of higher tax income and lower costs this year,” said Stephen Weiss of Short Hills Capital. “Muni professionals view her analysis with significant skepticism.”

State and local government tax revenue, excluding Federal aid, climbed above $1.6 trillion in the first quarter, according to data from Strategas Research Partners. That’s actually above the level before the credit crisis. Plus, there have been just 14 defaults totaling $605 million this year, according to Reuters, which cited data from Deutsche Bank Group.

“Year over year growth in muni revenues has been positive over the past two quarters, which is constructive for both state and local finances, as well a sign we are on the cusp of stabilizing state and local job losses,” said Joe LaVorgna, Deutsche’s chief U.S. economist, on Friday.

While backing away from her aggressive deadline, Whitney defended her call on CNBC this week, saying that the possible $100 billion in defaults would still occur because of a double dip in the housing market. Housing starts data is due out next week.

To be sure, recent economic data—such as last Friday’s abysmal jobs report—has fueled equity losses and hinted that Whitney’s call for an economic retrenchment may not be that far-fetched.

It’s just the magnitude of losses she’s predicting that investors have trouble believing—especially given the greater flexibility leaders have with spending cuts on the local level compared to the Federal level.

The iShares S&P Municipal Bond Fund lost seven percent in the fourth quarter of last year, with losses accelerating following Whitney’s prediction. The ETF, the national barometer for the overall market, has since rebounded four percent this year.

“Meredith got run over on her trade idea and it is not going to get any better if California can make inroads soon,” said Brian Stutland of Stutland Equities. The trader said he recently bought some of the iShares Muni fund after taking some money out of Treasuries.

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