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Fed Agrees With Citigroup on $3.7 Trillion Muni-Market Estimate

The U.S. municipal-bond market is 28 percent larger than reported in June, according to a quarterly Federal Reserve release, which used new data showing individuals own more state and local-government debt.

The face value of outstanding municipal bonds was $3.7 trillion at the end of September, based on figures from Mergent Inc., a private data vendor, compared with the previous figure of $2.9 trillion at the end of June, the Fed said.

“The estimate of household holdings of municipal securities and loans is revised up by about $840 billion, on average, from 2004 forward,” according to the Fed’s Flow of Funds Accounts report for the third quarter.

Citigroup Inc., using analysis of bond data, said in June that the central bank was underestimating the size of the local-government market, largely by failing to capture the amount of debt bought by individuals.

The bank estimated that the market was about $3.7 trillion. A Citigroup analyst, Vikram Rai, said the larger ownership by individuals may help explain volatility in tax-free securities amid concern about defaults by state and local governments, a risk that professional investors saw as more limited.

Fund Withdrawals

Investors pulled more than $30 billion from municipal-bond mutual funds from November 2010 to June, according to data from Lipper US Fund Flows. Lingering strains from the recession fueled speculation that defaults would jump, while banking analyst Meredith Whitney last year predicted “hundreds of billions of dollars” of municipal defaults.

Rai, a bond analyst in New York, said individual buyers were spooked by Whitney’s forecast. In most cases, they help insulate the municipal segment from volatility seen in other markets where short-term investors operate, he said.

“They’re more prone to negative headlines,” he said in an interview today. “In most circumstances, it will be a big plus that households have a large role to play.”

The tally of municipal debt held directly by households is now $1.9 trillion, up from $1.07 trillion in the prior report, Fed data show. That doesn’t count bonds owned indirectly, such as through mutual funds, which hold about $528 billion.

Analysts track the Fed figures to monitor changes in holdings by institutions such as insurance companies or mutual funds.

The amount of public U.S. Treasury debt is $9.87 trillion as of Nov. 30, according to Bloomberg data.

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