The Federal Reserve recently published its Flow of Funds for the third quarter 2025. Such statistical releases provide interesting views into the use of debt across households, financial institutions and governmental entities as well as reveal behavioral shifts from varied investor classes. I have generally relied upon this detailed data when analyzing municipal bond investor preferences and trends as well as identifying complementary source material for evaluating demographic patterns. This information can be quite useful for issuers, municipal advisors, legal counsel as well as for sell-side and buy-side stakeholders when developing role-based strategic initiatives.
I am particularly drawn to the flow of municipal security assets into household, money market/mutual fund/ETF, bank, and insurance company investment accounts. Individual retail investors (including their separately managed accounts), and their mutual fund proxies hold about 70% of outstanding municipal bonds according to MSRB data (
ETF benefits include real-time pricing and intraday flexibility, tax-efficiency, a more compelling fee structure thanks to index-based strategies and reduced trading or friction costs, transactional ease with no hedging or leverage, diversification, liquidity, and above-average credit quality attributes. Investors seeking higher tax-exempt income may favor high-yield muni funds and ETFs, as illustrated by weekly Lipper fund flow data. ETFs are expected to accelerate in 2026, with the asset class now representing a generational shift. With growing interest from younger investors, ETFs have moved beyond a risk allocation cohort into a more sophisticated, strategically designed investment vehicle.
New Federal Reserve data shows aggregate outstanding municipal ETF balances approximating $163 billion through Q3 2025, representing a 56% increase since 2022. From Q2 2025 to Q3 2025, cash allocations into muni ETFs grew almost 21%, reflecting compelling yield and income opportunities and clarified policy initiatives led by the preservation of the muni tax-exemption in last July's passage of the One Big Beautiful Bill Act.
Banks (including credit unions), held about $377 billion (9% of outstanding munis) of municipal securities through Q3 2025, a 19% decline since 2022. This trend can be attributed to substantially higher interest rates and their dilutive effects on bank portfolio valuations, producing heavy unrealized losses and resultant liquidity management actions. Lower corporate tax rates highlighted within the 2017 Tax Cuts and Jobs Act that weakened the tax advantage of holding municipal securities, bank losses (more regional) associated with the Silicon Valley Bank collapse in 2023 and heavily negative muni returns in 2022 generated further bank retrenchment from municipal securities. I would expect bank participation in 2026 to trend stable to modestly worse with very tight quarterly shifts depending upon the interest rate environment and levels of volatility.
Although insurance companies hold 9% of outstanding municipal bonds, their portfolio allocations to the asset class have been declining. While property and casualty insurance companies (P&Cs) are attracted to the tax-exemption, life insurance companies are focused heavily on taxable munis given their internal tax structure with lower taxable income relative to P&Cs. Accordingly, life insurance companies tend to be agnostic when it comes to taxable alternatives, making a relative value play a more strategic option, yet still focusing on longer duration bonds needed to match their long-term policy obligations. Much of the muni exposure reduction from insurance companies is due to a shift into higher-yielding investments.
The fed funds data show a 16% decline in P&C muni holdings from 2022 through Q3 2025. During the first three quarters of 2025, muni flows into P&Cs had been marginally positive. Again, policy and rate uncertainty likely skewed this trend, but I do expect P&Cs to make continued allocations into alternative asset classes. From 2022 through Q3 2025, life insurance companies revealed an 11% drop in holdings. During Q2 and Q3 2025, however, life insurers actually showed positive flows into municipal securities, likely reflecting a quality and diversification bias amid volatility, and higher rates offering yield and income opportunities given a steepening yield curve.
