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.
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