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

Mark A. Peterson

Journal of Financial Stability, 2024, vol. 72, issue C

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.

Keywords: municipal bond mutual fund; investor flows; flow-performance relation; financial fragility; liquidity management strategies (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:72:y:2024:i:c:s1572308924000524

DOI: 10.1016/j.jfs.2024.101267

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