Buy Side

Muni Holders Fall to Two-Year Low

Unable to shed a downward trend that first began early last year, ownership of municipal bonds by households fell to the lowest level in two years as it continued to decline in the fourth quarter of 2011, according to quarterly data recently released by the Federal Reserve Board.

Holders of Municipal Debt

Some investors were spooked by negative media reports about potential municipal bankruptcies or defaults, or turned their noses up at low interest rates, poor liquidity, and a crippling supply crunch, according to municipal experts. Others were sidelined by overall volatility in the financial markets, feared domestic fallout from the turmoil overseas, or caved to the pressure from a more attractive stock market, they said.

In any case, one or a combination of all these factors led to a 1.2% -- or $22.8 billion -- decline in household ownership of munis to $1.879 trillion in 2011’s fourth quarter, versus the $1.902 trillion held in the previous quarter. Annually, it dropped by $78.5 billion, or 4%, compared to the $1.957 trillion households owned in 2010 and even slightly less than the $1.896 trillion held in 2009.

Though households still hold roughly half of the $3.743 trillion in outstanding municipal assets as of the end of 2011, prior to last year, ownership by households rose consistently without fail, municipal experts noted.

“There certainly was a lot of turmoil at the end of 2010 and the beginning of 2011 -- retail was running scared, and fear didn’t leave the market until December,” recalled John Mousseau, managing director and portfolio manager at Cumberland Advisors in Vineland, N.J.

He said that fear translated into weakness in the municipal market as 5% interest rates on insured bonds prevailed at a time when 30-year Treasuries were yielding 3%. In addition, supply and liquidity issues turned many investors off.

“There was not nearly enough new issuance last year to keep up with bonds that were matured or called away,” he said, adding that poor liquidity improved marginally by year-end along with demand.

“We know that bond fund flows turned around at year-end 2011 -- but not enough to make up for the total bloodbath that the Whitney debacle caused in early 2011,” he said.

The second-largest holder of municipal debt, mutual funds saw modest increases at the close of 2011, increasing by 3% -- or $15.9 billion -- to $542.8 billion, up from $526.9 billion in the third quarter. That was slightly more than the $526.6 billion the funds held in 2010, after increasing from the $480.2 billion they held at the end of 2009, according to the data.

According to Lipper FMI, in the week ended Dec. 21, muni bond funds saw roughly $764 million of inflows from funds that report their flows weekly, on the heels of net inflows of almost $460 million in the week ended Dec. 14 -- a complete reversal of earlier in the year when money fled the funds in droves, often by more than a $1 billion a week up to more than $4 billion in the week ended Jan. 19.

Two of the other traditionally large holders of muni debt -- money market funds and property and casualty insurance companies -- meanwhile either increased slightly or managed to plateau.

Money market funds grew slightly by 1.5% -- or $4.5 billion -- to $296.5 billion in the final quarter, compared to $292 billion previously. Outflows dominated for most of the year, with a handful of short-lived inflow cycles --  including what was their largest of one-week increase in all of 2011 when the funds gained a stunning 1.9%, or $5.27 billion, in the week ended Dec.5 as assets settled at $289.94 billion, according to iMoneyNet.com.

Comparatively, however, money markets were down from $334.4 billion in 2010 and $401.3 billion in 2009.

Switching gears, property and casualty companies kept their ownership virtually consistent in recent quarters -- ending the quarter with $347.1 billion -- only $2.8 billion or 0.08% less -- compared to the $349.9 billion held the previous quarter. Similarly, they ended 2010 with $348.4 billion.

In other activity, broker-dealers also pared back their muni holdings in the quarter by 14.1% -- or $5.2 billion -- to $31.5 billion compared to $36.6 billion the prior quarter. The pull-back in their holdings was even more pronounced on a yearly comparison, as they held 21.3% -- or $8.5 billion -- less in 2011 than the $40 billion they owned in 2010.

U.S.-chartered commercial banks continued their pace of steady growth in the last several years, as they grew their muni assets by 4.8% -- or $13.2 billion -- to $285.9 billion from $272.8 billion in the third quarter.

Annually, the banks saw a $42.4 billion increase in holdings -- or 17.4% -- from $243.5 billion the prior year.

Likewise, banks in U.S.-affiliated areas also saw their holdings boosted by a 20.7% increase in muni ownership to $3.4 billion, up from $2.8 billion in the prior three-month period. Overall, meanwhile, they saw a 12-month increase of 35.5% from $2.5 billion in 2010, according to the data.


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