Unable to shed a downward trend that first began early last year, ownership of municipal bonds by households fell to the lowest level in two years as it continued to decline in the fourth quarter of 2011, according to quarterly data recently released by the
Some investors were spooked by negative media reports about potential municipal bankruptcies or defaults, or turned their noses up at low interest rates, poor liquidity, and a crippling supply crunch, according to municipal experts. Others were sidelined by overall volatility in the financial markets, feared domestic fallout from the turmoil overseas, or caved to the pressure from a more attractive stock market, they said.
In any case, one or a combination of all these factors led to a 1.2% — or
Though households still hold roughly half of the
“There certainly was a lot of turmoil at the end of 2010 and the beginning of 2011 — retail was running scared, and fear didn’t leave the market until December,” recalled
He said that fear translated into weakness in the municipal market as 5% interest rates on insured bonds prevailed at a time when 30-year Treasuries were yielding 3%. In addition, supply and liquidity issues turned many investors off.
“There was not nearly enough new issuance last year to keep up with bonds that were matured or called away,” he said, adding that poor liquidity improved marginally by year-end along with demand.
“We know that bond fund flows turned around at year-end 2011 — but not enough to make up for the total bloodbath that the Whitney debacle caused in early 2011,” he said.
The second-largest holder of municipal debt, mutual funds saw modest increases at the close of 2011, increasing by 3% — or
According to Lipper FMI, in the week ended
Two of the other traditionally large holders of muni debt — money market funds and property and casualty insurance companies — meanwhile either increased slightly or managed to plateau.
Money market funds grew slightly by 1.5% — or
Comparatively, however, money markets were down from
Switching gears, property and casualty companies kept their ownership virtually consistent in recent quarters — ending the quarter with
In other activity, broker-dealers also pared back their muni holdings in the quarter by 14.1% — or
U.S.-chartered commercial banks continued their pace of steady growth in the last several years, as they grew their muni assets by 4.8% — or
Annually, the banks saw a
Likewise, banks in U.S.-affiliated areas also saw their holdings boosted by a 20.7% increase in muni ownership to
Christine Albano writes for The Bond Buyer.
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