Yield-starved foreign investors are flooding the U.S. muni market

Unlike U.S. citizens, foreign investors are ineligible to take advantage of munis’ income tax-exempt feature.

Nevertheless, they’re piling into the $3.7 trillion muni market, validating the “safe haven” status many investors assign to munis. By the end of 2015, foreign investors held more than $85 billion in American municipal debt, up from $72 billion in 2010.

As of the end of April, nearly $10 trillion worth of government bonds across the globe bore a negative yield. As this amount climbs, inflows into high-quality, short-term munis are expected to accelerate.

Muni bond funds are already seeing a sustained run of weekly inflows that began in October, with a massive $1.2 billion entering the market in the week ended May 11, following $709.7 million the previous week. This includes both American mutual funds and ETFs, so domestic and foreign investors are reflected here.

One of my favorite investing proverbs is “Follow the money,” and in the case of short-term munis, it’s important to recognize that a global surge in demand is taking place as central banks continue to lower rates and debase their nations’ currencies. Municipal bonds, as well as gold, have traditionally satisfied investors’ need for a store of value when other options seem too volatile or risky. Today, the unfavorable monetary climate abroad makes American munis all the more attractive.

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About the Author

Frank Holmes is CEO and chief investment officer of US Global Investors.