Municipal Bond Market in U.S. Shrinks at 3.9% Pace, Fed Says

The U.S. municipal bond market shrank at a 3.9 percent annual pace during the third quarter as state and local governments pared sales of new securities to finance public projects, according to the Federal Reserve.

The amount of municipal debt slid at an annual rate of $110 billion during the three months through September, according to quarterly data released by the Fed today.

The $3.69 trillion municipal bond market is on path to shrink for a fourth straight year, the longest stretch in almost seven decades, as government agencies are hesitant to borrow money amid concern that the economy may falter. States and cities are still recovering from the recession that ended in 2009, which led them to cut spending and fire workers when tax collections dropped.

The cutback in bond sales has helped prop up prices in the tax-exempt market, easing losses that have come from speculation that interest rates will rise as the economy recovers. Bond prices move in the opposite direction of interest rates.

Individual investors have been shifting money away from the municipal market. In the three months through September, households, which directly own almost half of all municipal securities, reduced their holdings at an annual pace of $111 billion. Mutual funds cut their investments at an $82 billion rate, according to the Fed data. The figures are adjusted to reflect seasonal swings in holdings.

Yields on benchmark 10-year bonds rose last week to 2.99 percent, the highest since September, according to data compiled by Bloomberg.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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