1Q Muni Growth Slower Than Pre-Crisis Years

The municipal bond market grew in the first quarter at a slower pace than in pre-crisis years as the industry coped with a severe recession and life without bond insurance.

The amount of municipal debt outstanding at the end of the first quarter grew 1.3% from the end of the year, to $2.716 trillion, according to Federal Reserve data released Thursday.That represented a 2.7% annual growth rate from the end of the first quarter last year.
A 2.7% annual growth rate is a decided slowdown compared with the past decade. The amount of municipal debt outstanding grew at a 7% compound annual rate between 1999 and 2007. In 2008, the growth rate slowed to 2.4%.

Retail investors drove the growth in the first quarter. Households added $18.6 billion to their muni holdings during the first three months of the year, representing an increase of 7.5% from the year-earlier period.

The household sector is by far the biggest holder of municipals, with $968.5 billion.

Households owned directly almost 36% of outstanding munis at the end of the first quarter. That is in line with the trend since 1999.

Another source of growth associated with retail was mutual funds, which, driven by cash inflows from investors, beefed up their muni holdings by $16.5 billion.

Mutual funds’ $406.1 billion in holdings represent 15% of outstanding municipal debt. That too is in line with the historical trend.

According to AMG Data Services, investors poured about $11.5 billion into muni funds during the quarter. Funds reported an additional $13.2 billion in market appreciation.

Heavier holdings by households and mutual funds helped offset the exodus of cash from tax-exempt money market funds, which are the second-biggest holders of munis.

Money market funds dumped $11.9 billion into munis during the first quarter. The sector holds $482.7 billion in munis.

Other sectors to shed assets included government-sponsored enterprises, the holdings of which fell to $29.5 billion from $30.5 billion; commercial banks, which dropped to $213.8 billion from $215.6 billion; and the rest of the world, where holdings fell to $40 billion from $41 billion.

Many of those reductions were offset by the jump in municipal holdings by non-financial corporations, which rose to $17.8 billion from $7.7 billion, according to the Fed’s data.

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