Investors own more municipal bonds than at any time in history and strongly favored individual issues over mutual funds, according to flow of funds data released by the Federal Reserve.
The total volume of outstanding municipal bonds exceeded a record $2 trillion at the end of 2004, an increase of 6.9% from 2003, the Fed said. Issuers sold $360.2 billion in new debt last year, while approximately $357 billion was retired.
According to the Fed, individual investors make up the largest category of municipal debt holders, snapping up more than twice the amount in individual bonds than in mutual funds. Through 2004, households owned $661.7 billion in individual bonds, while mutual funds owned primarily by retail investors held approximately $294 billion.
To us, the data indicates two important facts: investors are moving toward genuine portfolio diversification and, by virtue of their strong preference for individual issues over mutual funds, they know where to find real value in the municipal bond market.