Rising interest rates stalled the growth of tax-exempt mutual funds during the first three quarters of 1994, according to Federal Reserve statistics.

Assets in the funds edged up to $220.6 billion at Oct. 31 from $217.9 billion at yearend 1993. The funds had doubled in size since the end of 1990.

The Fed's latest Flow of Funds report shows a slight decline in the total amount of outstanding municipal debt, to $1.21 trillion at Oct. 31, from $1.22 billion at Dec. 31, 1993, marking the first decline since at least 1979.

While their overall holdings of municipals are relatively small, brokers and dealers saw the largest drop in the municipal holdings -- more than 27%. Analysts cited declining municipal issuance as well as market volatility as culprits. Brokers and dealers are the 10th largest holders of municipals out of 14 categories reported by the Federal Reserve.

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Meanwhile, after showing three years of annual declines, assets of money market funds grew by $7.1 billion during the first three quarters, to $110.5 billion from $103.4 billion at yearend 1993.

Households logged a hefty $23.6 billion decline in overall municipal bond holdings to $409 billion from $432.6 billion.

Some analysts disagree with the Federal Reserve figures.

"There should be an increase in 1994" in households' holdings of municipals, said George D. Friedlander, a managing director and portfolio strategist at Smith Barney Inc.

"We're seeing enormous buying of intermediate and long-term [bonds] by retail that dramatically outpaces bonds being called," the strategist said.

Household data is derived by subtracting all other reporting sectors from the total outstanding debt.

The Fed, meanwhile, stands by its statistics.

"In general, the muni market has been very weak," a Federal Reserve official said as explanation of the household sector falloff. "If debt is decreasing, it's got to come from somewhere. We haven't changed anything."

The $9.3 billion increase in holdings by bank personal trusts may be more indicative of the real trend among households, Friendlander said.

"It's important that [the data] reflect the real world a little better because it does affect policy decisions by issuers about how to distribute" their bonds, Friedlander said.

Rising interests rates and the effects of leverage have clipped the growth of municipal closed-end funds, which held $45.1 billion of municipal bonds at Oct. 31, up slightly from $44 billion at yearend 1993.

Improved profitability, meanwhile, has brought property and casualty insurers back as buyers in the municipal market this year, Friedlander said. Municipal holdings of property and casualty insurers rose by $5.5 billion to $151.6 billion.

The insurers are looking to replace the higher coupon municipal bonds that were refunded when interest rates were low, Friedlander said.

Despite improved profitability, commercial banks' tax-exempt holdings declined by $600 million over the first three quarters, to $98.6 billion.

"Commercial banks are a disappointment. Despite being more profitable, they put that money into more lucrative loans" instead of investing in municipals, said Richard A. Ciccarone, executive vice president and director of tax-exempt fixed-income research at Kemper Securities.

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