Investors withdrew money from municipal bond funds at the fastest pace in more than a year as they sold assets to pay income tax and tried to protect earnings under signals that the Federal Reserve would keep interest rates high for longer.

According to LSEG, municipal bond funds outflowed in the week to Wednesday.LuckyelfnodepositbonusIt fell by $1.5 billion, the biggest decline since December 2022. Outflows broke eight consecutive weeks of inflows, sparking a debate about whether the outflow cycle will begin this week.

Katherine McNamara, senior municipal bond strategist at UBS Global Wealth Management (UBS Global Wealth Management), said the tax season was one reason for the sell-off, as investors often sold duty-free municipal bonds to repay debt around the April 15 filing deadline. Another factor, she said, was volatility and rising Treasury yields, which pushed "uneasy" retail investors aside.

Vikram Rai, head of municipal bond market strategy at Wells Fargo & Co., wfargo, saidLuckyelfnodepositbonus"there is some protective selling going on." He said investors were worried about the Fed's failure to cut interest rates, inflation stickiness and global tensions.

Yields on 10-year US government securities have risen over the past few months as the market adjusts for later-than-expected interest rate cuts.

John Miller, head of First Eagle Investments's high-yield municipal credit team and chief investment officer, said 10-year Treasuries rose nearly 40 basis points in April alone and nearly 75 basis points so far this year on a series of strong economic data and "somewhat disappointing" inflation reports. Municipal net worth has fallen this month. "there are concerns that the Fed may not cut interest rates at all this year."

"coupled with the loss of liquidity during the tax season, I think that's why there have been recent capital outflows," Miller said. "

Wells Fargo's Rai said he would wait to see traffic data over the next three to four weeks and then draw a conclusion on whether the latest data became a trend.

Municipal fund flows tend to follow the Treasury market, and large fluctuations could drive "large and long-term" capital outflows, according to a report by Barclays on Friday. "as a result, capital outflows this week are unlikely to be an one-off, especially if the sell-off continues," strategists led by Mikhail Foux said in the report.

Strategists at Bank of America Securities (BofA Securities Inc., BofA) say they think buying opportunities are just around the corner.

"pessimism is becoming excessive as markets debate the extremes of inflation and the possible posture of the Fed," strategists wrote in a report on Friday. " The market is about to enter a turning point, investors should be prepared to intervene in the short term. "