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Investor flows, performance, and fragility of U.S. municipal bond mutual funds

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  • Peterson, Mark A.

Abstract

We examine the determinants of investor flows into, and the potential market fragility imposed by, U.S. municipal bond mutual funds. We find that funds have a linear flow-performance relationship that is consistent with effective liquidity management strategies. Funds use liquid holdings to partially offset net redemptions, but trade municipal bonds in proportion to flows. Funds increase their liquid holdings after flow volatility increases. The fact that funds use a vertical slice approach as a primary strategy is not surprising because they maintain small amounts of liquid securities. Our evidence is consistent with investors not being concerned with municipal bond mutual funds promoting run-risk.

Suggested Citation

  • Peterson, Mark A., 2024. "Investor flows, performance, and fragility of U.S. municipal bond mutual funds," Journal of Financial Stability, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finsta:v:72:y:2024:i:c:s1572308924000524
    DOI: 10.1016/j.jfs.2024.101267
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    References listed on IDEAS

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    More about this item

    Keywords

    municipal bond mutual fund; investor flows; flow-performance relation; financial fragility; liquidity management strategies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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