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Muni Market Shrank to $3.72 Trillion in Q2 as Households Unload

The market for U.S. state and city debt shrank to about $3.72 trillion last quarter as households cut their holdings to the smallest in more than six years, according to the Federal Reserve.

The size of the municipal-bond market fell about $7.5 billion, or 0.2 percent, in the three months through June, from about $3.729 trillion as of March 31, according to a quarterly release from the central bank today.

Households owned about $1.65 trillion of the securities last quarter, the least since March 2007, data compiled by Bloomberg show. Brokers and dealers cut their holdings to $19 billion, the least since June 2002.

Yields on local bonds soared in June as investors bet that the Fed would curb its monthly bond buying. The benchmark 10-year security saw its interest rate climb 0.55 percentage point, the biggest monthly increase since at least January 2009, Bloomberg data show.

The Fed’s surprise decision last week to refrain from reducing the monthly purchases has driven a fixed-income rally. Yields on benchmark 10-year munis plummeted to 2.7 percent as of noon in New York, the lowest in three months.

State and local debt has still lost 3.3 percent this year through Sept. 24, the worst performance since the same period in 1999, according to Bank of America Merrill Lynch data.

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