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Munis Keep Raking in Cash, Posting Respectable Gains

Despite concerns about Puerto Rico and higher rates, municipal-bond funds have continued their run in 2016.

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After a strong showing in 2014 on both an absolute and relative return basis, muni bonds again emerged as a top-performing asset class in 2015. Driven by strong inflows to municipal-bond funds and a mostly benign credit environment, the national muni-bond fund Morningstar Categories were among the best-performing of Morningstar’s U.S. bond categories. Yet with the fear of additional Federal Reserve rate hikes and the muni market’s largest default looming as Puerto Rico’s credit quality deteriorated, some market watchers cast doubts on whether muni bonds would continue to their run into 2016.

Flows Into Muni-Bond Funds Remain Strong
Those worries faded quickly in the first half of this year. The Fed’s rate hike failed to materialize, and overall credit quality throughout the muni market remained solid. Assets continued to pour into muni-bond funds, offsetting an increase in supply as more municipal borrowers came to market. Through June 2016, funds in Morningstar’s open-end municipal bond categories experienced nine consecutive months of net inflows totaling roughly $37.4 billion. The biggest recipients of those assets were the more interest-rate- and credit-sensitive of the group, with strong net flows into the muni national intermediate-term, muni national long-term, and high-yield muni categories.

Elizabeth Foos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.