The amount of outstanding tax-exempt debt grew to $2.618 trillion in 2007, and money market funds continue to be the fastest-growing category of bondholders.

The $2.618 trillion figure is up 8.9% from $2.403 trillion in 2006, and 2.3% higher than the $2.561 trillion recorded for last year's third quarter, according to data released last week by the Federal Reserve as part of its quarterly flow of funds report.

While traditional households are still the largest muni holders with $916 billion of bonds through the fourth quarter, the category declined slightly from the third quarter, and grew much slower from 2006 to 2007 than money market funds - up 5.8% compared to 27.9% growth in 2007 for money market funds, which rose 10.7% in the fourth quarter.

Money market funds rose to $473.5 billion in 2007, up from $370.3 billion in 2006, and $430.7 billion in the third quarter.

Chris Mier, managing director and fixed-income strategist at Loop Capital Markets LLC, said there are a number of reasons as to why money market funds continued to increase in the fourth quarter, one possibility being asset reallocation.

"They'll park their money in a money market fund for a period of time," he said. "So with the stock market being in the condition it was in, particularly in the fourth quarter, some pressure, some volatility, some ups and downs, maybe people started to gradually harvest their equity gains from the previous couple of years and they started going at least temporarily into the money funds."

Despite the growth in holdings by money market funds, traditional buy-and-hold investors continue to be the largest holders of muni debt, despite a slight decline over the fourth quarter.

Household ownership of municipal debt in at the end of 2007 accounted for $916 billion of the $2.62 trillion of municipal assets outstanding, a 5.8% increase from the previous year, and the sector's highest level of ownership over the past 10 years, according to fund flow data provided by the Fed.

However, while it increased over the past year, the category is down 0.2% from $917.7 billion in the third quarter.

"That's basically saying that they reinvested their money, and they didn't take money out of other markets to buy more," said Fred Yosca, managing director and head of trading at BNY Capital Markets. "This is consistent with what was going on back then. There was a lot of concern over insurance, credit quality, and derivative products. A lot of people remembered what happened in August. And munis weren't that attractive back then relative to anything, so why shift money into that asset?"

The household sector has been steadily increasing its ownership of municipal assets each year since 1997, when it owned $497.6 billion.

The largest year-over-year jump in household ownership was seen from 2001 to 2002, when the sector's combined assets grew to $678.7 billion from $581.1 billion, according to the data.

Mutual funds remain the third largest holder of municipal debt, after narrowly edging out property and casualty insurers in 2006. Mutual funds rose 8.0% to $371.8 billion in 2007 to $344.4 billion in 2006, but remained largely flat from the third to the fourth quarter. At the end of the third quarter, there were $371.4 billion in mutual funds.

Property and casualty insurers showed a bigger rise in the fourth quarter, but a smaller rise overall in 2007, as more distance was put between them and mutual funds from 2006. Property and casualty insurers accounted for $351.6 billion of municipal bonds through the fourth quarter of 2007. This is a 1.8% increase over $345.4 billion through the third quarter, and $335.2 billion through the fourth quarter of 2006.

Brokers and dealers showed the largest percentage of growth from third quarter to fourth quarter. They now account for $53.8 billion of muni bonds, up from $45.9 billion after the third quarter.

The largest decline both in the fourth quarter of 2007 and in the year in its entirety came from state and local government retirement funds, which account for just $800 million of municipal debt. This category dipped 17.7% in the fourth quarter from $900 million in the third quarter, and 55.8% for the year, from $1.7 billion in 2006.

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