By Trevor Hunnicutt
NEW YORK (Reuters) - Investors funneled the least cash to U.S.-based municipal bond funds in more than a year, Investment Company Institute data for the latest week showed on Wednesday, the latest sign that demand in some fixed-income categories is waning.
The muni mutual funds and exchange-traded funds (ETFs) attracted just $299 million in the week through Oct. 12, the trade group's data showed. That amounts to the funds' worst weekly showing since September 2015, which was the last time the funds recorded net withdrawals.
In the year since, investors have pumped more than $60 billion into muni funds, seeking a low-risk alternative to trillions of dollars in bonds now yielding less than zero. There are $10.9 trillion of negative-yielding government bonds globally, according to Fitch Ratings data as of Sept. 12.
Muni funds buy debt issued by cities and states, which pay interest exempted from U.S. federal income taxes, making them particularly appealing to wealthy investors.
But the funds have delivered negative returns in five of the last six weeks, Thomson Reuters Lipper data showed, their worst such streak since the massive inflows began last year.
"Investors are rotating to taking on more risk," said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. "Muni funds have had weekly inflows for nearly a year, and that could be coming to an end, which is notable."
Like other categories of bonds, municipal debt performance is hurt by rising interest rates. In 2013, for instance, munis sank during the "Taper Tantrum," when yields spiked after the Fed suggested it might scale back a massive bond-buying program it was using to stimulate the economy.
Muni yields have risen in recent weeks as investors digest the possibility that the Federal Reserve may raise rates in December.
Earlier Lipper data also showed that investors pulled cash from investment-grade corporate debt funds at the fastest rate since March during the same week.
Overall, though, ICI said bond funds took in $5 billion during the week, showing that lagging results in some fixed-income categories has not derailed a strong year of momentum for bond funds overall.
International stock funds attracted the most money since August, pulling in $800 million during the week. But domestic stock funds were out of favor, pushing net withdrawals for U.S.-based stock funds to $3.7 billion overall.
(Reporting by Trevor Hunnicutt; Editing by Meredith Mazzilli)