Magnetic muni funds grow most in 21 months

Investors added about $1 billion to U.S. municipal-bond mutual funds in the week that ended Dec. 7, the most since March 2010, as 10-year benchmark yields fell to the lowest since September.

The funds have attracted about $3 billion since mid-October, according to Lipper US Fund Flows data. Yields on top- rated 10-year municipals fell to 2.005 yesterday, from a two- month high of about 2.58% on Oct. 13, according to Bloomberg Valuation data. Yesterday’s benchmark tax-free yield was just above the 2.003% interest rate on Sept. 23, the lowest since the index began in January 2009.

Investors are adding cash to municipal funds to tap into the rally in the $3.7 trillion market and to boost assets they deem relatively safe before month-end, said Matt Fabian, managing director of Concord, Mass.-based Municipal Market Advisors, in a telephone interview.

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“It’s probably partly the rally and partly just allocations into year-end, getting portfolios ready for year-end to show a larger allocation of fixed income,” Fabian said.

Net additions in the past couple of months are a reversal from earlier in the year. Investors pulled more than $30 billion out of the funds from November 2010 to June as lingering strains from the recession fueled speculation that municipal defaults would jump.

In contrast with the decline in 10-year yields, interest rates on top-rated tax-exempts maturing in 30 years increased in the past two months to 3.85% yesterday, according to Bloomberg data. A basis point is 0.01 percentage point.

The yield on the longer-maturity index was 185 basis points above that on the 10-year gauge yesterday, the widest gap since at least January 2001, when the Bloomberg Valuation data began.

–Bloomberg News–