WASHINGTON - The total amount of outstanding municipal securities in the market rose 0.55% to $3.71 trillion in the second quarter of this year, while the holdings of U.S. banks expanded to $477 billion, a 2.5% increase from the first quarter's $465 billion.
The Federal Reserve Board released the data Friday as part of its quarterly Flow of Funds report.
The 0.55% rise in munis follows a 1.5% gain on a year-over-year basis.
Bank holdings in the U.S. have been on a steady rise over the past few years, with total holdings already $25 billion, or 5.5% higher in the second quarter of this year than the end of 2014 and $47 billion or 10% more that the same quarter last year.
Matt Fabian, a partner at Municipal Market Advisors, said banks have been "a major demand factor" in the industry, probably partly due to direct lending, but also because big broker-dealer banks are buying for their portfolios and community banks are buying munis as an alternative to traditional lending.
"The slow economy is inhibiting lending opportunities for banks and they wind up lending to munis because munis are infrastructure, they do satisfy a public purpose," Fabian said. "They are generally very safe pursuant to the income you get."
Households accounted for $1.57 trillion of the muni debt, a 0.8% increase from the first quarter. However, household holdings are still far lower than they were in 2010 and 2011, when they were closer to $1.8 trillion.
Part of the decrease since 2011 is because of low interest rates, Fabian said. He also said broker-dealers are encouraging more investors to pursue funds and that managed money can bring higher net dividends in a low-yield environment because funds will invest more boldly than the average investor.
Total amount of short-term outstanding munis of state and local governments also dropped in the second quarter, falling significantly to $31 billion of the total debt from $38 billion the previous quarter.
Foreign-held muni debt rose to a record high, making up about $86 billion of total muni debt outstanding.
Fabian said the rise in holdings from outside the U.S. could be due to Puerto Rico bonds or could be a sign that global investors are searching for yields they ultimately find in U.S. bonds.
Muni holdings by state and local governments and by brokers and dealers stayed relatively flat. State and local government holdings totaled $14.2 billion in each of the last two quarters and were only $200 million more than at the end of 2014. Brokers and dealers accounted for $19 billion of the muni debt holdings, $1.6 billion less than in the first quarter.
Money market fund muni holdings continued a general decline in the second quarter, falling to $258 billion from $274 billion in the first quarter, a 6% decrease. That decrease is likely attributable to people growing more pessimistic about the country's economic growth who have lowered their expectations for rising interest rates, Fabian said.
Property and casualty insurance company muni holdings rose by 0 .4% to $322 billion from $320 billion the previous quarter. The muni holdings of life insurance companies also increased to $149 billion from $148 billion, a 0.6% gain.
The Federal Reserve funds data is next scheduled for release on Dec. 10.
