Muniland: the big picture (part 1)

January 26, 2012

A lot of municipal bond reporting zooms in on particular issuers or sectors and assumes that the reader understands the broader market. But the municipal bond market is foreign to most people, and I thought that it might be useful to sketch out the bigger picture. Here are some quick bullet points:

1. As of the third quarter of 2011 the size of the municipal bond market was $3.733 trillion. To put that into perspective, as of Jan. 25 there was $15.236 trillion of U.S. Treasury debt outstanding.

Source: Federal Reserve Flow of Funds (page 92)

2. Municipal bonds issued by state and local governments predominate, but there are also large amounts issued by nonprofits (think hospitals) and industrial revenue bonds (think sewer and water systems).

Source: Federal Reserve Flow of Funds (page 92)

3. Who owns municipal bonds? Overwhelmingly it is individual investors. They own 52 percent of outstanding muni debt.

Source: Federal Reserve Flow of Funds (page 92)

4. Where does demand for municipal bonds come from? Mainly, it arises from the redemption of maturing bonds and interest payments ($73 billion to individuals in 2009), which are often recycled into purchases of new bonds. In the chart below, 2011 saw fewer redemptions than usual but also much lower supply. Smaller supply increases the velocity of demand.

Source: RSW Investments of Summit, New Jersey

5. Are municipal bonds just for the 1 percent? Actually, no. People in every income bracket own municipal bonds. In fact, the largest concentration of ownership lies with individuals who earn between $100,000 and $200,000 per year.

Source: 2009 IRS data (XLS data file).


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