While much of the country ramps up its borrowing, state and local governments are continuing their penny-pinching ways as outstanding municipal bond debt continues to fall.

Federal Reserve Board figures for the second quarter showed outstanding municipal bond debt by states and cities declined to $3.8 trillion. That’s down $14.6 billion from the first quarter, and is the fourth consecutive quarter it’s dropped.As Everyone Else Borrows, Municipal Bond Debt Shrinks

Meantime, borrowing by businesses, households and the federal government is on the upswing.

Municipal bond debt falls, borrowing elsewhere rises

The tightening supply of municipal bonds hasn’t deterred individual investors.

Retail investors increased their muni holdings by about $6 billion in the second quarter of 2019 to $1.892 trillion, while mutual funds bumped up their muni holdings to $772.7 billion from $737.2 billion in the first quarter.

The boost in individual holdings comes amid an easing by institutions. Banks shed about $100 billion in bonds, according to The Bond Buyer, since the tax overhaul in late 2017. The law cut the corporate tax rate to 21% from 35%.

Bank holdings fell by more than $14 billion in the second quarter of 2019 vs. the first quarter, from $491.1 billion to $476.4 billion.

What successful muni investors ignore

Longtime investors won’t be shocked by the increasing demand for munis while supply contracts and yields decline. Nor will they expect much to change soon.

As we’ve discussed (“Munis’ Looking-Glass Moment”), the reticence of states and cities to borrow is a decade-long phenomenon, a result of the lingering effects of the Great Recession.

Of course, officials’ wariness of fiscal calamity comes at a cost, as infrastructure needs continue to pile up across the nation. According to the American Society of Civil Engineers, the bill to fix U.S. roads, bridges, drinking water systems, dams and other public assets by 2025 comes to $4.6 trillion – more than the federal government spends in a year.

Veteran muni investors understand where to look for value in the market (“Finding Bonds When The Muni Supply is Tight”). They know that waiting for yields to change is futile and sacrifices tax-free income, and long-term success is achieved by keeping their interest clock ticking.

James A. Klotz is the President of FMSbonds, Inc. Email the Author09/26/2019