‘Dumb Money’ Flees Muni Funds as U.S. Investors Snap Up Individual Bonds

John Hirsch, 57, has been buying municipal bonds during the past four months, taking advantage of falling prices as muni mutual funds are forced to sell them to cover withdrawals.

“I have no interest in trading bonds,” said Hirsch, a consultant to the medical industry in Clermont, Florida. “I’m going to hold until maturity, and at maturity I’ll get the face value back.”

Investors withdrew about $40.4 billion from U.S. municipal- bond mutual funds in the five months through March, according to Morningstar Inc. (MORN), a Chicago-based research firm. Retail investors purchased about $3 billion more in individual municipal bonds in the first quarter this year than in the same period last year, according to data on trades of $100,000 or less from the Municipal Securities Rulemaking Board, which regulates muni dealers.

Surging investor withdrawals force mutual-fund managers to sell in a falling market. Investment-grade muni bond prices have dropped 4.6 percent in the six months through April, as measured by the Bank of America Merrill Lynch Municipal Master Index.

“The people who are redeeming are the dumb money, because they’re redeeming into a market where prices are down,” said Alexandra Lebenthal, chief executive officer of New York-based Lebenthal & Co., which manages about $170 million in municipal- bond separately managed accounts. Her firm has received about $30 million in new money since December.

American households own $1.1 trillion of municipal debt, or about 37 percent of the market, and represent the largest holders, according to U.S. Federal Reserve data.