Retail investors in municipal bonds are shaken, but still standing, after a relentless barrage of forecasts of massive municipal bankruptcies and defaults this year.
Mom and pop investors have been bombarded with a swarm of negative headlines since a nationally televised prediction in December by Wall Street analyst Meredith Whitney that there would be widespread bankruptcies and "billions of dollars in defaults" by 50 to 100 municipalities this year.
"It appears that the wave of selling generated by acute credit fears has calmed down in the last two weeks," said Guy LeBas, the chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.
According to Lipper FMI, outflows from muni bond funds moderated to $1.07 billion in the week ended Feb. 2 — the second consecutive week of smaller outflows and the lightest pace since early December. Outflows began moderating in the week ended Jan. 19, when redemptions totaled $1.9 billion — roughly half the historic volume of $4.2 billion the preceding week. January outflows are estimated at $12.9 billion, according to preliminary data from the Investment Company Institute.
Whitney's comments unnerved individual investors because they sounded convincing, given the weak market fundamentals at the time, analysts said. Muni and Treasury yields inched up during the fourth quarter, and the January sell-off hit the $471.81 billion municipal mutual fund industry hard. Funds' selling to satisfy share redemption demands worsened the price declines.
"Retail investors are still bitterly divided about the risks and the opportunities in the municipal market, but they are not panicking [as] they were for several weeks," said Anthony Parish, the vice president of fixed-income and a product specialist at Deutsche Bank in New York. "They have stopped running and are now taking a break to reassess the situation."
Sources said that the reduced outflows indicated a willingness by many investors to stay in the game, one way or another. Many retail investors use investment strategies that range from minimizing risk and remaining conservative to maximizing yield opportunities by extending maturities and considering securities of lower credit quality.
