Total sales of tax-exempt bond funds could surpass those of U.S. government bond funds by the end of 1993, according to the Investment Company Institute.
Investors seeking tax-exempt income purchased $20.6 billion of long-term, national municipal bond funds during the first six months of 1993, a 44.6% increase over the same period last year.
In comparison, sales of long-term U.S. government funds totaled $22.1 billion in the first half of 1993, an 8.1% decline from the $24.1 billion sold in the same period last year.
If municipal funds continue to hold their allure to investors, sales of those funds could outstrip their U.S. government counterparts by yearend, the company said.
A reemergence of tax-exempt mutual funds as the top-selling funds would reverse a trend of the last two years. Total sales of U.S. government bond funds surpassed that of municipal funds in 1991 and 1992, the company said.
The mutual fund company trade group attributes the latest resurgence in tax-exempt sales in part to an expectation of higher federal income taxes, brought about by efforts to reduce the federal budget deficit.
The total sales of national and single-state long-term municipal funds increased 46% to $37.32 billion in the first six months of the year compared with the same period last year.
Total sales consist of new money into funds, plus investors' reinvested ividends.
"Unless there's a change in the wind, it's entirely conceivable long-term municipal bond funds could be the most popular category of bond fund groups" by the end of the year, said John Collins, a spokesman for the Investment Company Institute.
"There's nothing on the horizon that would make municipal bond funds less palatable in the next few months," Collins added.
The company classifies short-term money market funds as those whose portfolios have an average weighted maturity of 90 days or less. In addition, these funds generally hold individual securities with a maturity of no more than 13 months. Long-term bond funds consist of all other open-end mutual funds, not classified as money market funds, the company said.
Net new sales of municipal bond funds rose in the first half of the year to $21.1 billion, a 64.3% increase compared with $12.8 billion of net new sales last year. The net new sales, or new money into funds, excluding reinvested dividends and minus redemptions, gives a clear indication of how much new cash investors channeled into funds.
Demand should continue to be strong for municipals throughout 1993, said Thomas J. Kenny, manager of municipal research for Franklin Resources in San Mateo, Calif.
Several factors, including continued cash from the redemption of high-coupon municipals and the likelihood of higher federal taxes, should send investors flocking toward tax-exempt securities, the Franklin executive said.
Kenny anticipates that these factors should push investors who have been skittish about plowing cash into municipals because of historically low yields back into the tax-exempt arena.
Franklin manages about $40 billion in tax-exempt assets in 40 open-end mutual funds, including three money market funds.
The company has seen strong interest recently in three new intermediate-range municipal bond funds it launched earlier this year, Kenny said. Franklin is just one of many mutual fund companies that have either started their first intermediate funds or added to such offerings in the past year.
Investment managers also have been touting securities that generally have maturities ranging from about five to 1 2 years, since they offer more yield than shorter maturities and less volatility than long-term securities.
Franklin has a national, New York, and California intermediate funds. Kenny declined to give the assets of the funds.
Total assets of long-term municipal bond funds totaled $230.76 billion in June, a 32.6% increase over funds' assets of $174 billion in June 1992. Tax-exempt money market funds saw assets increase 4.4% to $97.04 billion, compared to $92.96 billion last year.
"Now we have several things that are all positive for municipal funds," said John G. Taft, president of The Voyageur Funds in Minneapolis. "But if any of these reverse, it could be negative for municipals.
Voyageur has approximately $2 billion in tax-exempt assets under management in 20 funds, including five closed-end mutual funds.
A sudden spike in long-term interest rates could send the net asset values of some tax-exempt mutual funds plummeting, Taft said. This might stall some first-time investors in tax-exempts from investing more cash in the market near-term, Taft said.
But, Taft added, executives at his firm are not anticipating any sharp upward movement in rates soon.
in addition, if the Clinton tax plan is abandoned, many municipal investors who have been purchasing bonds in anticipation of higher tax rates could stop buying tax-exempts, Taft said.
While record refunding activity has kept issuance strong, a decline in volume could cause spreads between tax-exempts and taxable securities to widen. As a result, some investors might find taxable alternatives more attractive to municipals, Taft added.
However, Taft and Voyaguer are banking that municipal bonds will continue to entice investors.
"We're staffing up to support sales at a continuing level," Taft said.