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Individuals Buying More Muni Securities

Personal holdings rise 7.7% in the fourth quarter as many opt to purchase the bonds outside of mutual funds.

March 05, 2004|From Bloomberg News

Personal holdings of municipal bonds rose 7.7% in the fourth quarter of 2003 as individuals chose to buy debt sold by state and local governments themselves rather than through mutual funds.

Individuals accounted for $25 billion, or about two-thirds, of the $36.2-billion increase in municipal bond holdings in the quarter, according to the Federal Reserve's fourth-quarter "flow of funds" report, released Thursday. In the same period, bond holdings by mutual funds grew by less than 1%.

"Individuals are buying more municipal bonds themselves rather than through funds," said Ying-Chen Li, a muni bond strategist with Merrill Lynch & Co.

Direct ownership of bonds provides investors with a fixed maturity date and a fixed stream of interest payments. By contrast, holdings of mutual fund portfolios change over time, and the interest the funds pay can fluctuate with market rates.

Overall last year, individuals increased their municipal bond holdings 10% to $680.6 billion. Individual holdings have risen 51% from the $450.2 billion held at the end of 1999, according to the Federal Reserve.

Muni bonds also are becoming more attractive because the interest they pay is tax exempt, and because many investors are taking a more cautious approach with their portfolios after the stock market's plunge from 2000 through 2002, analysts say.

"Some individual investors are taking a more pessimistic view of the stock market," said Brad Gewehr, director of municipal research at UBS Financial Services Inc.

Individuals are finding it easier to buy their own municipal bonds because of the ability to find bonds and information about them on the Internet, Li said.

Mutual fund holdings of municipal bonds grew 4.9% last year to $291.1 billion. Money-market fund holdings of municipal debt rose 5.1% in 2003 to $297.3 billion and closed-end fund holdings of municipal bonds rose 3.7% to $89.7 billion.

Individuals, through mutual funds and directly, owned 72% of the $1.9 trillion of municipal bonds outstanding at the end of 2003. The remaining municipal bonds are held by commercial banks, insurance companies and trusts, according to Federal Reserve data.

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