We take a trip through the latest Federal Reserve (FR) Z.1 report data relating to municipal bonds, holders and related credit factors such as public pension funding and consumer debt such as student loans.
Following tax reform, which lowered corporate income tax rates, U.S. Chartered Depository Institutions, Property-Casualty Insurance companies reduced their municipal holdings (as the tax exemption became less valuable). Mutual Funds and, to a lesser extent, ETF’s and Closed End Funds picked up the slack (and Life Insurance companies in 2019). The pattern reversed in 2020 and 2021 with these institutions increasing their municipal holdings. We venture to say that some of this might be due to a COVID effect that left banks with more cash on hand. The relative value and safety of municipals compared with lower-return Treasuries helped too.
On the liability side, state and local government bonds outstanding grew over the last four years. In the absence of tax-free advance refunding (a tax reform loss), and presence of low treasury rates, taxable refunding of tax-exempt bonds became feasible. As a result, and like advance refunding, two issues remain outstanding until the refunded bonds can be called, partly contributing to the growth in outstanding bonds in 2020 and 2021.
As we’ve noted in the past, the household sector includes nonprofit entities (which issue, but do not hold, municipal tax-free securities) as well as hedge funds, private equity funds and personal trusts. Since the Federal Reserve began keeping statistics on hedge funds, we break them out on the chart below, although they represent a minor portion of the household sector.
The FR also keeps track of private and public pension funds, both defined benefit and defined contribution. Compared with Census figures, the FR counts the unfunded portion of public funds as an asset on the household balance sheet as entitlements. This, plus the fact that the Census figures include only the top 100 plans explains the difference in dollar amounts. The table below gives a broad brush of asset allocation while Census has greater detail. (A link to the Census data can be found here.)
Finally, we present selected consumer debt from the Z.1. You can see that student loan debt, in the table below, which surpassed credit card and auto loans some years ago, has continued to grow.
