Tax-exempt money market funds are gaining cash from the massive amount of long-term municipal bond sales during the month of October, managers of those funds and some bond dealers say.
But in spite of these cash infusions, some fund managers think the attraction to short-term municipals will be short-lived. These fund managers are betting that many investors are merely parking cash in the short end in anticipation of higher long-term rates after an expected Clinton victory tomorrow.
The cash inflows are significant because they mark the tax-exempt market's first trickles toward the short end in recent months. Lately, investors have shunned money market funds and taxable certificates of deposit due to historically low short-term yields.
These recent cash flows have yet to be detected by most data. During September, the latest month for which figures are available, net new sales and net exchanges for national tax-exempt money market funds declined by $1.78 billion, according to the Investment Company Institute in Washington. The institute figure includes cash from new sales as well as exchanges among funds in the same family or fund group.
However, weekly figures from AMG Data Services in Arcata, Calif., show that tax-exempt money market assets increased by $136.4 million during the week ended Oct. 28. Assets of the funds increased a total of $4.7 billion during the month, and declined by $3.7 billion in September.
Meanwhile, assets of no-load municipal bond funds declined by $454.9 million for the week ended Oct. 28 and had net declines of $ 2.2 billion in October.
Assets of all long-term municipal bond funds declined by $429.6 million during the Oct. 28 week, but posted a net increase of $1.7 billion in October.
"I'm not placing any long-term bets" that the money is going to be stable, said Casey Colton, a portfolio manager for Benham Capital Management. Colton said assets in Benham's one national and two California money market funds have increased by between 2% and 4% this month. Each California fund has about $300 million in assets, and the national fund has assets of about $100 million.
But in order to stave off widespread selling of securities if he is faced with redemptions, the cautious portfolio manager said he has increased the liquidity of the portfolios. He had done so by purchasing more liquid securities, such as bonds with daily put features, in case investor outlook changes.
Some municipal dealers estimate that as much as $2 billion of long-term municipal bonds have been offered for sale so far this month. Huge amounts of those bonds have been dumped into the market by long-term tax-exempt bond funds because of investor redemptions. This is because recent price declines have lowered the net asset value of some bond funds and prompted investors, especially in no-load funds, to redeem fund shares.
No-load funds are those in which shares are sold with no or only a nominal sales charge, usually because the funds are marketed directly to individual investors. As a result, investors are not charged a fee for redeeming their shares in the funds.
Several dealers and portfolio managers pointed out, however, that losses from the selling are not expected to reach the level of those seen in 1987. At that time huge declines among taxable securities prompted sizable investors selling of municipals.
Dealers caught with huge inventories of unsold bonds also saw heavy losses. One estimate of industry and dealer losses on fixed-income taxable and tax-exempt securities during April 1987 came to $650 million.
The hefty losses in the tax-exempt arena were partly responsible for the departure of Salomon Brothers from the municipal business.
That selling spree began in late March 1987 when foreign investors concerned about the value of their dollar-denominated investments began selling U.S. Treasuries. Sales of municipal securities and redemptions in open-end municipal bond funds quickly followed. During April 1987 investors redeemed about $ 2.76 billion of municipal bond fund mutual shares, according to the Investment Company Institute.
This time around, dealers attribute most of the market's price declines to investor uncertainty surrounding the presidential elections. But "it's not as bad as people have been writing about," one municipal dealer said. "I've got better buyers than sellers at these levels."
Additionally, in 1987 the bond funds had a lot of "hot money," said Jonathan Conley, vice president and portfolio manager for Federated Research Corp. in Pittsburgh.
Hot money is money that is removed quickly from bond funds by investors generally seeking high short-term yields.
But some fund managers are still seeing asset declines. Dave MacEwen, portfolio manager of several long-term bond funds for Benham, said his funds have seen about a $5 million net decline in assets this month, compared with monthly net asset increases of about $10 million to $15 million for most of the year.
"We have seen quite a lot of redemptions, particularly the no-load funds," MacEwen said.
Municipal bond funds "have been killed in the last few weeks," said Steven Harrop, co-manager of the Strong Municipal Money Market Fund at Strong/Corneliuson Capital Management. "Our money market fund is a beneficiary of that."
During the first three weeks of October, Harrop said, his fund gained $50 million in assets. The fund picked up another $9 million in a single day last week, Harrop added.
Some of that cash has come from investors redeeming shares from the firm's long-term municipal bond funds, which have seen some net asset value declines, the portfolio manager pointed out.
While Strong/Corneliuson's $242.3 million national municipal bond fund has seen an increase in redemptions during the past two weeks, the fund is still posting $3 million in net inflows for the month, said spokeswoman Jody Lowe. October's net inflow is slightly lower than in September, Lowe said, but she declined to give specifics.
Karen Mahoney, a portfolio manager with Shearson Lehman Advisors, said, "During October, we did see a good amount of cash." But, she added, "I wouldn't know exactly where the money is coming from."
Mahoney said the firm's money market fund started seeing a decline in redemptions in late September and a pickup in cash inflows in early October. Shearson's $3.5 billion money market fund has posted a 5% increase in assets in October after logging a 1.5% asset decline in September, the portfolio manager said.
"At this point, most of the cash is staying. We're not having the redemptions that we normally see at the end of the month," Mahoney added.
The money market fund may be gaining some cash from short-term taxable investors, Mahoney speculated. She pointed to the 2.26% yield on Shearson's tax-exempt fund, which translates into a taxable equivalent yield of 3.28%. Current yields available on the firm's taxable money market fund are about 2.92%, she said.
"There's a reason to be here" in a tax-exempt fund, she added.
Fidelity Investments portfolio manager David L. Murphy, who manages about $2.2 billion in four Fidelity funds with average maturities of two to 15 years, said he has seen declines in assets among the longer-term funds he manages. "Some people are shortening up maturities, but I don't know where all of the money is going," he said.
Fidelity, one of the country's largest mutual fund operations, has been rumored to be a heavy seller of bonds from its no-load bond funds in order to raise cash to cover the costs of sizable investor share redemptions.
Among the long-term funds, which have average maturities ranging from seven to more than 15 years, net asset declines have ranged from $4 million to $6 million.
Meanwhile, in Murphy's short-term fund, which has an average maturity ranging from two to four years, he has seen a $15 million asset increase in October.
"There's all this uncertainty over the election and on what policies are going to be followed afterward," Murphy said.
"Municipal bond funds typically buy long [maturities], so it's the nature of the beast that there's going to be some volatility," the portfolio manager added. "So investors should be prepared."