Sooner or later, it was bound to put bonds in a bind.
Falling money-market rates have pushed more money into mutual funds, and officials at T. Rowe Price Associates Inc. are acknowledging that one popular bond fund is having a little trouble deciding where to put it all.
Price's Maryland Tax-Free Bond Fund has seen its assets grow 53 percent since Jan. 1, to a total of $432 million under management, said Price's Vice President Mary J. Miller, the fund's manager. Since the debt issued by the state, counties and other agencies that sell bonds to the funds grew only 29 percent in the first nine months of this year, finding places to put 53 percent more money is tricky.
"It puts a little pressure on the market," Mrs. Miller said. "I don't think I'd present it as a problem."
But she said that the fund, which usually specializes in long-term debt, has had to buy more paper with medium-range maturities than it usually would.
"We haven't stepped down in credit quality," she said, because the interest rates on shakier credits aren't high enough to justify the risk.
Tax-free bond funds have seen strong growth in demand because of falling interest rates on competing investments and because federal taxes have risen, said Cynthia Seibert, who manages the Market Master Maryland Bond Fund in Washington.
There are 12 Maryland bond funds in the market, and eight of them opened last year or this year. T. Rowe Price has by far the biggest, with a 40 percent-plus share of the $1.06 billion invested in Maryland tax-free bond funds, Mrs. Miller said. The overall investment in Maryland bond funds has grown 51 percent this year, she said, roughly matching the growth of Price's fund.
Ms. Seibert said that her fund hasn't had the same problem as Price because its investment philosophy emphasizes medium-term bonds -- ones maturing in three to 10 years. Victoria M. Schwatka, who manages a similar fund at Legg Mason Inc. in Baltimore, said that her fund also hasn't run into a problem yet.