By Lisa Lambert
WASHINGTON, March 6 Individual investors have
been fleeing the U.S. municipal bond market for more than a
year, and data released by the Federal Reserve on Thursday shows
they now hold the smallest amount of the debt in more than seven
The household sector held $1.62 trillion in municipal bonds
in the fourth quarter of 2013, compared with $1.647 trillion in
the previous quarter. That was the lowest since $1.58 trillion
in the first quarter of 2006.
Households are still the biggest investors in a market that
has shrunk for three straight quarters. Total outstanding
municipal debt ended 2013 at $3.671 trillion, the lowest since
it ended 2008 at $3.52 trillion.
Last year proved calamitous for the municipal market.
Spooked by possible interest rate increases and financial
earthquakes in Detroit and Puerto Rico, many individuals fled
and put their money into the rising stock market. Mutual funds
that held Puerto Rico debt because of its special tax treatment
were also hit with massive withdrawals.
Meanwhile, issuers ended a refinancing surge amid rising
yields, shrinking the supply of new bonds.
The beginning of 2014 has shown the trend could continue.
Sales of new bonds hit a 14-year low in February, according to
Thomson Reuters data. While money began flowing
back into municipal bond funds, Lipper data shows February
marked the smallest monthly net inflow, at $422 million, since
According to the Federal Reserve, individuals shed $147
billion of municipal bonds in the fourth quarter after dropping
$83.1 billion the previous quarter.
The central bank adjusts data on flows of money for seasonal
variations in its quarterly "Financial Accounts of the United
States" report. The flows, then, may not correspond to the
levels of municipal bonds, which are not seasonally adjusted.
Mutual funds also walked away from municipal bonds. They
dropped $39.3 billion worth of bonds in the fourth quarter,
while closed-end funds shed $100 million and exchange-traded
funds $300 million, according to the seasonally adjusted data.
One sign of interest comes from U.S. banks, which held
$416.4 billion in bonds at the end of 2013, the largest on
record going back to 1951.