Individual investors continued aggressively buying tax-free municipal bonds in 2005, according to the Federal Reserve Board’s quarterly “Flow of Funds” data.
Holdings by individual investors climbed to a record high of $845.2 billion as of Dec. 30, 2005. This figure reflects a jump of 11%, or $83.5 billion, in household municipal securities holdings from year-end 2004. Household ownership has grown every year since 1996, when individual investor holdings totaled $498 billion.
The steady increase in retail investor tax-free bond purchases is attributable to a number of factors. Foremost is the fact that baby boomers, nearing retirement, are converting an increasing portion of their assets into income-producing investments.
Some individual investors have also become disenchanted with the equity markets, which have produced lackluster and erratic returns over the last several years. Many sustained anguishing losses in the aftermath of the Internet bubble and have become more conservative with regard to their investment capital. In this context, municipal bonds have become increasingly popular for their lower risk factors and dependable income stream.
Household holdings now account for almost 40% of the $2.23 trillion outstanding municipal debt. If retail-investor dominated mutual funds ($313.2 billion) and money markets ($337.1 billion) are included, individual investors hold approximately 66% of outstanding municipal debt.
