Household Impact on Munis Continues to Grow

Retail investors continue to lead the charge in fueling the fastest growth in outstanding state and local government debt in two years.  In the first half of 2009, households’ purchases of municipal bonds were more than double their average annual purchases since 1996.  That said, households have been the top holders of municipal debt for the past 12 years.  A further look at the statistics is quite revealing and provides further evidence of the voracious appetite in the retail sector.

Households added $42.3 billion to their municipal bond portfolios and now own, according to the Fed, almost $1 trillion of municipal bonds, out of about $2.78 trillion outstanding.  Over the past year, the municipal market has grown by $112.8 billion.  During that span, households have acquired $102.3 billion in munis.   As far as maturity preference, many investors have moved out on the yield curve in search of higher income, no doubt because of the extremely low short-term rates.  The result has been a decline in tax-exempt money market fund assets of over $428 billion from their peak in January.

Clearly, the appeal of tax-free investing has never been stronger.  With expectations of higher income tax rates, there is no end in sight to the record buying pace of the household sector.

Source: Federal Reserve Board, Flow of Funds Accounts, Flows and Outstandings, Q2 2009.

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