Broker-dealers ended the first quarter of 2008 with 31.7% more in municipal debt on their books than they had at the end of 2007, according to Federal Reserve flow of funds data that is likely due to the freeze in the auction-rate securities market.

Broker-dealers held $66 billion of municipal debt at the end of March, compared to $50.1 billion to close 2007, according to the recently released data. However, that total remained a small sliver of overall municipal debt outstanding, which increased to $2.66 trillion from $2.62 trillion in the quarter.

"Part of the dealer holdings has to do with the collapse of the auction market," said George Friedlander, managing director and fixed-income strategist at Citi.

The downturn in auction-rate securities also had an impact on the books of non-financial corporate businesses, which had used the ARS market to manage short-term cash holdings. When turmoil hit earlier this year, many companies unwound their positions, leading their holdings of municipal debt to shrink to $21.3 billion from $32.6 billion, a 34.7% fall.

"The reduction in non-financial corporate business [holdings] makes all the sense in the world. That's auction rates, they were heading for the hills," said Matthew Dalton, chief executive officer of Belle Haven Investments. "As soon as there were issues in those, they started putting them back. And not every bank stopped taking them back."

Money market funds saw their municipal holdings increase $21.8 billion for the quarter to $495.3 billion, likely due to conversions and refinancing, Friedlander said.

In addition, property and casualty insurers continued to steadily increase their holdings, adding 2.3% in debt for a total of $377 billion in the first quarter.

But analysts caution against drawing too many conclusions from the data. For one, quarterly data is often filled with noise, especially after a period of market turmoil. Friedlander, for instance, believes tender-option bond programs may be double-counted in the tally.

And because the Fed does not collect data on households, it calculates household holdings as a residual of all other sectors. In other words, the Fed tallies the total amount of municipal debt and subtracts from it the holdings of all other groups to arrive at the household total. This means hedge funds, private-equity groups, and other firms that don't publicly report data on their holdings may be counted in the household sector, making it difficult to determine the reason behind any movement in that figure.

Household sector muni holdings declined 1.7% to $896.7 billion in the first quarter, a $16 billion decrease, according to the data.

"Given all the noise in the data, it's tough to see," said Martin Mauro, fixed-income strategist at Merrill Lynch & Co. "Just in any one quarter, there's all sorts of things."

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