Magazine article American Banker

Mutual Funds' Holdings of Municipal Bonds Surged in '92

Magazine article American Banker

Mutual Funds' Holdings of Municipal Bonds Surged in '92

Article excerpt

Households remained the largest holders of municipal bonds in 1992, but mutual funds posted the sharpest increases among all investors, according to the Federal Reserve.

Holdings of the tax-exempt debt by households climbed 4% to $599.8 billion. Open-end mutual funds boosted their holdings by 26% to $137.1 billion, solidifying their position as the No. 2 holder of municipal bonds.

"I'm surprised the household sector is up, because with all of the bond calls you would have expected that sector to be down," said George Friedlander, a managing director at Smith Barney, Harris Upham & Co.

Closed-End Funds Grow

Growth among closed-end mutual funds may have accounted for some of the strong gains in the household sector, according to Mr. Friedlander.

Closed-end mutual funds are registered investment companies that raise substantially all their assets at the time they are established. Shares in the funds are traded on stock exchanges or over the counter.

In contrast. open-end mutual funds - the more common type - sell and redeem shares whenever investors wish to do so. Their assets grow or shrink, depending on demand.

|Most Dramatic' Gain

In 1992, there were 117 closed-end municipal funds with assets totaling $34.31 billion, according to Lipper Analytical Service Inc.

By comparison, at the end of 1990, closed-end municipal funds had assets of about $13 billion, said Anthony N. Maltese, first vice president of equity research at Lehman Brothers.

"The growth of the municipal sector of the closed-end fund market has been the most dramatic within the last two years," Mr. Maltese said.

Prompted by declining interest rates, many investors searching for yield have turned to the leveraged closed-end funds, which can offer investors extra yield because of the steepness of the yield curve and the wide spread between short-term long-term rates, he said. …

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