Recently revised figures published by the Federal Reserve that track investor demand for tax-exempt securities still underreport total outstanding debt and retail investor purchases, some municipal analysts say.
"It's a mess. The numbers have nothing to do with the real world," said George D. Friedlander, a managing director in the portfolio strategy, high net worth department at Smith Barney Inc.
"The problems are still there," Friedlander said of the Federal Reserve's second-quarter 1994 Flow of Funds Accounts report.
The Federal Reserve's estimate of $1.22 trillion of debt outstanding at the end of the first half of 1994 is off by about $200 billion, Friedlander said. As a result, Friedlander estimated that the amount of municipal bonds held by individual investors is $610 billion, not the $410.2 billion reported by the Federal Reserve.
"Households should be closer to $600 billion, and growing -- not shrinking," Friedlander said.
At the end of the second quarter of 1994, households remained the largest holder of municipal bonds with $410.2 billion, down from $431.7 billion at the end of 1993, the federal report said.
The second largest holder was mutual funds, which saw holdings rise to $219.8 billion in the second quarter, from $217.9 billion at the end of last year.
Property and casualty insurance companies ranked third, with $151.8 billion, up $5.7 billion from $146.1 billion.
Friedlander and other market analysts have criticized the Flow of Funds statistics for underrepresenting retail demand. Although there can be a lag, most figures in the report come directly from holders. Because the Federal Reserve is unable to get an accurate accounting from households, the household estimate is primarily the difference between the total outstanding and the total of all reporting sectors.
Evan Lamp, a vice president and senior municipal strategist at Merrill Lynch & Co., estimated that the Federal Reserve figures underestimate the amount of municipal securities outstanding by about $200 billion. Lamp attributed the discrepancy to bonds that were advance refunded in 1992 and 1993.
"They do the best they can with the data they have," Lamp said. "By underestimating issuance, they're underestimating the household sector."
In a special report in August, Friedlander and another Smith Barney analyst, Bart Mosley, wrote that the Flow of Funds figures underreport the amount of debt outstanding and retail purchases.
The analysts attributed the discrepancy to the way in which the Federal Reserve accounts for outstanding refunded bonds, or advance refunded securities. The Fed derives the bulk of its information for this category based on the change in SLUGS, which are Treasury securities that issuers purchase from the federal government. The securities are used to fund escrow accounts that pay for advance refunded securities.
This method incurred problems when interest rates began declining in 1992 and 1993 and issuers began purchasing Treasuries for escrow accounts in the open market rather than from the federal government.
Federal Reserve officials have acknowledged the problem. But the agency is reluctant to revise the data until it can find a replicable method to base the changes on, an official said.
The second-quarter 1994 Flow of Funds Accounts report includes annual revisions that the government makes to the report. The current estimate of household sector holdings is derived in pan from updated 1991 and 1992 information from the Census Bureau and the Federal Reserve Board's Survey of Consumer Finances for 1992.
"We have no real feel for how much [open market] Treasurys are being used to defease debt," a Federal Reserve official said.
"This is our best guess of what we think is out there," the official said.
Some analysts are wary of drawing concrete conclusions based on some of the figures in the Flow of Funds report.
The decline in the household sector seems unuSUal,. Said Richard A. Ciccarone, director of tax-exempt fixed-income research at Kemper Securities Inc.
"This one comes with some surprises because we've been seeing increased retail activity this year as rates go higher," Ciccarone said.
The rise in retail buying earlier in 1994 may have been offset by a huge wave of bond redemptions this year, the Kemper analyst said. But future 1994 Flow of Funds reports should show the increased individual purchases, he said.
A strong $7.8 billion rise in money market fund holdings to $111.2 billion and an increase in bank personal trusts could signal a defensive stance by investors, Ciccarone said.
