While households trimmed their holdings of municipal bonds in the fourth quarter of 2012, tax-exempt mutual funds managed to steadily increase their ownership over the same period as investors' need for slightly more risk to offset historically low interest rates led to a marginal shift in asset allocation.
"Households dipping again, for a second straight year is important, but not alarming, given the likely reasons behind the decline," said Sean Carney, director and municipal strategist at BlackRock. "Rates in 2011 and 2012, were well below where previous purchases were constituted, and as bonds were called away it was difficult to stomach reinvesting at historically low yields—thus alternative products were likely used within the municipal space," he said.
While
The latest household totals represent a 2.7%, or $46.9 billion, drop from $1.72 trillion that households collectively held in the third quarter, and a 7.4%, or $133 billion, decrease from the $1.81 trillion they owned in the fourth quarter of 2011.
"Rates had come down dramatically during that period and because of that, individuals left the market because they would have had to go out so long to get any semblance of yield," said Howard Mackey, president of the broker-dealer division of Rice Financial Products. "It was an example of the headlines—the equity market had grown at the expense of fixed income," he explained.
