(Bloomberg). — The $4 trillion-dollar market for local and state government debt appears to have investors looking for an exit. 

The Refinitiv Lipper US Funds data shows that they took $344million from long-term municipal bond mutual funds, and $460 million form high-yield funds in the week ending Wednesday. Overall they put just $37 million into municipal funds, the least since an outflow in March and down steeply from last week’s $408 million inflow.

This is a weaker season for municipal bonds, so the easing of funds flows occurs at a time when they are less likely to be in demand. Over the next month, investors will see a decrease in cash flow through redemptions payments. In October, new debt sales are expected to grow. In September, the municipal market suffered a 0.7% drop. This was the second consecutive month with negative returns. It also saw the lowest monthly return since February.

Patrick Luby, a municipal strategist at CreditSights, says there’s no reason to panic just yet but said it is concerning giving broader market and economic trends.  “There doesn’t appear to be a wholesale change in sentiment,” he said. “When you look at it within the context of weak prices and concerns about inflation, concerns about everything else I think it’s definitely a yellow flag.”

While these factors haven’t been enough to spur significant outflows, the market is on the precipice, said Vikram Rai, head of municipal strategy for Citigroup Inc (NYSE:). 

“It’s not enough to trigger an outflow cycle but we’re getting close,” he said. “I expect that we will survive this. As long as Treasuries don’t continue to sell off.”

Federal Reserve has hinted at a possible pullback in its Treasury purchases. This already pushes benchmark yields higher, which is another weight on performance. Luby indicated that the trend of weakening demand will lead to market outflows and a period of low performance if it continues. 

“The bid side could be pressured pretty quickly if there’s outflows from mutual funds,” Luby said. “If that pressures the entire muni curve I would expect munis would under-perform.”

Similar: Municipal Bond Funds Receive $37 Million in Inflow; Weakest since March

©2021 Bloomberg L.P.