How much do mutual fund flows affect the muniland yield curve?
Municipal bond yields rocketed up late last May after Federal Reserve Chairman Ben Bernanke commented on the likelihood of quantitative easing being drawn back at the year’s end. Mutual fund investors, spooked by possible losses from rate increases, began exiting muni funds.
S&P Indices does a good job of aggregating yields for all maturities and credit qualities (i.e. 5, 10, 20 and 30 year bonds rated AAA, AA, A, BBB). But a even rich index like S&P doesn’t show us some of the finer movements of the market.
Thomson Reuters Municipal Market Data plotted AAA general obligation bonds maturing in 5, 10, 20 and 30 years. This gives us a more precise picture of yield movements across the interest rate curve over time. You can see the same yield spike that happened in late May and early June in the S&P index.
What caught my attention about the Municipal Market Data chart was how the yield spread between 20 and 30 year AAA GO bonds narrowed when yields moved up quickly (see how closely the green and yellow lines track each other?). I wondered if mutual funds were selling longer-dated bonds to meet redemptions, which flattened the long end of the curve. Dan Berger of Thomson Reuters Municipal Market Data said that it is hard to know exactly, but provided me with the chart below that maps the slope of the yield curve against mutual fund flows. Something is happening, but it’s not conclusive. Insights and comments are welcome.