WASHINGTON — U.S. banks' holdings of municipal bonds increased to $507.5 billion in the first quarter of 2016, a 1.7% gain from the $499 billion of holdings in the fourth quarter of 2015.
The Federal Reserve Board released the municipal market data on Thursday as part of its quarterly Flow of Funds report.
The total amount of outstanding municipal securities in the market rose, although not as significantly, to $3.75 trillion in the first quarter of 2016 from $3.71 trillion at the end of 2014, a 0.75% increase.
The total amount of munis in the market increased 1.4% on a year-over-year basis with state and local government bonds outstanding returning to levels near those of 2010, according to the data.
Bank holdings increased a substantial 8.3% over the same one-year period. They have almost doubled since banks held $255 billion of munis in 2010.
However, while retail investor holdings — the largest of any category of muni holdings -- increased with $1.6 trillion in the first quarter of 2016, they have declined nearly inversely to bank holdings since 2010. Retail investors accounted for 43% of total holdings in this year's first quarter while they made up about half of all holdings, or $1.9 trillion, in 2010.
Dorian Jamison, a municipal research analyst with Wells Fargo Advisors in St. Louis, said the drop is likely due to the decline of bond insurance since 2010.
"After the collapse of triple-A bond insurers, [the municipal market] became more of a credit market and I think that caused some of the decline we have seen in household holdings," he said. "There were just some more credit questions surrounding the bonds than there were when we saw the triple-A ratings."
Jamison added that the rise in bank holdings can partly be attributed to munis holding a better relative value than Treasury bonds in recent years. Additionally, banks are more sophisticated investors than households so, as the municipal sector became more of a credit market, the banks played more of a role.
Fund holdings went through several changes in the first quarter compared to the last quarter of 2015. Money market mutual fund holdings dropped to $239 billion in the first quarter of this year from $268 billion in the fourth quarter of 2015. Mutual funds, on the other hand, rose by roughly 4% to $628 billion in the first quarter from $604 billion in the previous quarter.
Jamison said the rise in mutual fund holdings may also be attributable to the better relative value of munis recently compared to Treasuries.
Other groups of holders, like state and local governments, life insurance companies, and credit unions, were relatively stable in the first quarter of 2016 compared to the end of last year.
The next Flow of Funds is scheduled to be released on Sept. 16.
