Buy Side

Muni Debt Held Slips A Bit in 2Q

Low new-issue volume and active early redemption of debt contributed to a decline in the amount of outstanding municipal debt in the second quarter to $2.89 trillion.

Holders of Municipal Debt

That was the second consecutive quarter to see a decline and only the fourth quarter since 2000 that the amount of outstanding municipal debt has shrunk, according to Federal Reserve numbers.

Second-quarter numbers are down from $2.91 trillion at the end of the first quarter and down from $2.93 trillion in the fourth quarter of 2010. However, muni debt in the second quarter is up 1.5% from a year ago, when debt stood at $2.84 trillion.

Total municipal debt also shrank in the third quarter 2000, the second quarter of 2010, and the first quarter of 2011.

However, not everyone agrees with the Fed’s calculations. Citi analysts continue to maintain that their estimate of all outstanding muni debt is $3.7 trillion, a significant $800 billion difference from what the Fed calculates.

Citi analyst Mikhail Foux said the large discrepancy between Citi’s numbers and the Fed’s numbers can be attributed to counting methods. “The Fed gets their numbers by looking from the perspective of the holders of debt and we are looking at it from the issuer side, from which we estimate the total of outstanding debt from all the securities,” he said.

The calculation for the household sector is where the biggest difference comes into play between the Fed’s figures and Citi’s numbers. Citi estimates that households are under-reporting their holdings by $800 billion.

However, Citi analysts did say that the Fed’s quarter-over-quarter increments are “usually consistent with our observations,” adding that light new-issue volume and heavy bond calls contributed to the decline for the second straight quarter.

“This is no big surprise,” said Alan Schankel, managing director at Janney Capital Markets, referring to the declining amount of outstanding municipal debt. “Issuance has been down and I think that’s consistent with the outstanding numbers declining.” He added that the low numbers appear to be “more of a blip than the beginning of a trend.”

The biggest holders of municipal debt — the household sector — increased their muni debt assets minimally, to $1.07 trillion in the second quarter from $1.05 trillion a year ago, Fed numbers show. Assets are down over 2% from the end of the first quarter when the household sector held $1.09 trillion.

Mutual funds, the second largest holders of municipal debt, increased their assets only 1.1% to $520 billion from last year’s second quarter of $514.2 billion. Going against the general trend, muni bond mutual funds increased assets by $5 billion in the last three months.

Property and casualty insurers saw numbers fall across the board, with year-over-year assets falling almost 3% to $348.2 billion from $358.7 billion in the second quarter of 2010. Municipal debt held by P&C insurers also declined by $1.5 billion from the end of the first quarter.

The fourth-largest holders, muni bond money market funds, held $305.8 billion.

The fifth-largest holders of municipal debt are U.S.-chartered commercial banks, which saw assets rise over 17% to $256.3 billion from $218.4 billion this time last year. The banks have been steadily increasing holdings of munis for the past decade. The increase in bank holdings of muni debt could be attributed to direct loans, according to Schankel. “Direct loans are a rising part of the business and they’re skipping the public market and going directly to the issuer,” he said. “That could be why banks are increasing holdings.”

Some of the largest increases in municipal debt came from the smallest owners.

Life insurance companies, which hold $116.1 billion of assets, increased their holdings by 28.3% from this time last year, when they held $90.5 billion. Life insurers have been increasing muni assets, jumping from $47.1 billion in 2008, to $73.1 billion in 2009, to $112.3 at the end of 2010.

Banks in U.S.-affiliated areas, which hold only $2.5 billion of muni debt, increased holdings by over 25%. Brokers and dealers also saw a 16% jump to $40.6 billion from $35 billion. Both types of holders are off their highs when they held $3.5 billion and $51 billion in muni debt several years ago.


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