Fed report puts municipal market at $2.69 trillion at end of 2008; household sector gobbles up issuance

By Angela McDaniels

Tacoma, Wash., March 12 - The total amount of municipal securities and loans outstanding increased to a total of $2.69 trillion at the end of the fourth quarter, according to the Z.1 flow and outstandings report release by the Federal Reserve on Thursday.

The figure is $19.2 billion, or 0.7%, greater than the amount outstanding at the end of the third quarter and $71.3 billion, or 2.7%, greater than the amount outstanding at the end of 2007.

Of the $2.69 trillion outstanding at the end of 2008, the majority - $2.23 trillion - was issued by state and local governments.

The amount of municipals outstanding issued by non-profit organizations was $270.6 billion, and the amount issued by non-financial corporate business was $192.6 billion.

And of the $2.23 trillion issued by state and local governments, $2.1 trillion was long term and $132 billion was short term.

On the buy-side, the household sector held $959.8 billion of the securities at the end of 2008, followed by money market mutual funds with $494.9 billion, mutual funds with $388.8 billion, property-casualty insurance companies with $369.0 billion and commercial banks with $215.6 billion.

Those sectors were the top five holders of securities throughout 2008.

From the third to the fourth quarter, the amount of securities held increased for the household sector (up 4.2%), money market mutual funds (3.6%) and property-casualty insurance (1%) and declined for the commercial banking sector (down 3.5%) and mutual funds (down 2.6%).

From the second to the third quarter, the commercial banking sector had increased its holdings in municipals by 10.1%.

Among the smaller holders, brokers and dealers dropped their municipal holdings by 37.5% to $38.7 billion at the end of 2008, and non-financial corporate business increased its holdings by 48% to $11.1 billion.

Despite the increase, the $11.1 billion held by non-financial corporate business is still much smaller than the $30.3 billion it held at the end of 2007.

Flow falls to $38.7 billion

On a seasonally adjusted annualized and net basis, the municipal securities and loans market issued $38.7 billion of securities in the fourth quarter of 2008, according to the report.

The figure is a notable decline from the $95.5 billion recorded in the third quarter and much smaller than the $195.3 billion for the fourth quarter of 2007.

For the full year, 2008 recorded $71.3 billion of issuance, which is only a third of the $215.5 billion issued in 2007. The figure was $177.4 billion for 2006 and $195.0 billion for 2005.

The breakdown of the fourth-quarter's total is $25.7 billion for state and local governments, $11.3 billion for non-profit organizations and $1.7 billion for non-financial corporate businesses.

State and local government issuance continued its rollercoaster ride. On a seasonally adjusted annualized and net basis, issuance was $75.7 billion in the first quarter before falling sharply to $19.8 billion in the second quarter, climbing to $67.6 billion in the third quarter and plunging to $25.7 billion in the fourth quarter.

Issuance by non-profit organizations more than doubled from $14.5 billion in the first quarter to $33.0 billion in the second quarter before settling down to $25.6 billion in the third quarter and then falling to $11.3 billion in the fourth quarter. These figures are also on a seasonally adjusted annualized and net basis.

On the buy-side, net purchases made by the household sector surged to an annualized $147.6 billion in the fourth quarter from $81.6 billion in the third quarter and from a net decrease of $5.4 billion in the fourth quarter of 2007.

The household sector purchased the most securities during the fourth quarter on an annualized and net basis, trailed by money market mutual funds with $39.2 billion, non-financial corporate business with $14.3 billion, property-casualty insurance companies with $14.2 billion and the rest of the world with $12 billion.

Broker and dealer sentiment for municipals cratered in the fourth quarter. That sector went from $40.6 billion of net purchases in the third quarter on a seasonally adjusted annual basis to a net decrease of $92.8 billion in the fourth quarter.

Mutual funds and commercial banking also posted sizable net decreases in annualized purchase amounts for the fourth quarter of $41.3 billion and $34.2 billion, respectively.

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