The Federal Reserve’s Z.1 flow of funds report came out yesterday and we updated our table of municipal securities holders.  We have a few observations:

  • Concern that tax reform would reduce the value of tax-exempt securities for corporate holders held true for banks and property and casualty insurers in the 2017-2019 period, as shown in the table below.
  • Life insurance company holdings, however, held steady during that period, perhaps since they prefer longer term investments. The treasury yield curve flattened significantly between 2017-2019, while the municipal yield curve remained less affected, highlighting the attractiveness of longer-dated municipal securities. 
  • Since 2019, we are seeing holdings increase for each of the corporate sectors, and mutual fund holdings inflows increased significantly as of Q3 2020.  Holdings by international investors have continued to grow as well.
  • The household sector is more than just mom and pop retail investors. Rather it is a residual of a number of other investors that the federal reserve lumps together. For one, the household sector includes hedge funds which has only recently been highlighted in the Z.1 reports.  We include hedge fund holdings in the table.  As many know, hedge fund buying and selling behaviors are quite different from mom and pop retail, but the level, as we now know, is not meaningful enough to move the dial. 
  • Just FYI, the household sector also includes  private equity funds and personal trusts as well as nonprofit organizations.  Nonprofit organizations include private foundations, charitable trusts and 501(c)(3) through 501(c)(9).  501(c)(3) are the familiar nonprofit hospitals and higher education institutions and a few others.  For the curious reader, the other 501 categories are: civic leagues and social welfare organizations, labor and business organizations, social and recreational clubs, fraternal beneficiary societies and voluntary employees’ beneficiary associations (or VEBA).   
  • These nonprofit organizations do not likely have much in the way of municipal security holdings, although the nonprofit balance sheet in the Z.1 shows combined US government and municipal securities of $122.5 billion at the end of 2019.  This amount has grown from $107.6 in 2016 so it’s possible that nonprofits have added taxable municipals to their investments and US government securities have maintained rock-bottom returns through this period, but we cannot confirm. There is no obvious breakout between US government and municipal securities in the data for the nonprofit sector.
  • On the liability side, we do have figures for the nonprofit sector “outstandings” and we added this to the table as a matter of interest, although these figures do not represent holdings.  Not surprisingly, the nonprofit group have been redeeming more securities than they are issuing; hence the decline in outstanding liabilities between 2016-2019.