Households by far outpaced all other holders of municipal bonds during the first quarter of 1993. with assets of $591.8 billion, according to the Federal Reserve's Flow of Funds Accounts.

The household sector continued its firm footing despite a $5.6 billion decline in assets compared with the end of 1992.

For the first time, assets of tax-exempt money market funds, at $99.9 billion, surpassed those of commercial banks, which had $96 billion of assets during the quarter.

Mutual funds, the second largest holders of municipals, saw the largest increase in assets of any sector during the quarter. Assets of the funds grew by $14 billion to 186.9 billion.

"What you could have is a shift in household holdings from straight municipal bonds to mutual funds. and I would expect that trend to continue," said Peggy Gartin, a senior portfolio officer for John Hancock Mutual Funds in Boston.

One reason for the first-quarter decline in household holdings of municipal bonds is that individuals were being forced to forfeit bonds due to the record amounts of bond calls in which high-coupon bonds are being redeemed and replaced with lower coupon debt, Gartin said. Afterwards, buyers are having trouble replacing the securities, in part due to strong demand for tax-exempts from other market sectors.

"Retail brokers are having a hard time coming up with bonds to sell to individuals. it's harder to come up with something which individuals will buy," Gartin said.

New sales of municipal bond funds increased by 85.6% during the first quarter of 1993, compared with the same period one year ago, according to the Investment Company Institute. Strong investor demand marked a record quarter for new fund sales, an ICI official said.

During the quarter, national funds saw an 87.2% increase in new sales. However. single-state funds, which have been growing in popularity, had stronger asset growth, of about 37% to $94.11 billion, ICI said.

Tax-exempt municipal bond funds were introduced in 1976 and the first money market funds arrived in 1977. The bond funds did not become a significant factor in the market until 1991 when their assets surpassed those of commercial banks and they became the third largest holder.

During the first quarter of 1993, commercial banks' tax-exempt assets fell by $1.6 billion to $96 billion. As a result, the banks dropped to the sixth largest holders of municipals.

Commercial banks were the largest group of investors in municipal bonds in every year except one from 1965 through 1986, according to the Federal Reserve.

In 1987, banks were overtaken by households as the largest holders of tax-exempts, and dropped to third behind property and casualty insurance companies in 1989. The banks were the fourth largest holders of municipals at the end of 1992.

Commercial banks, hurt by the Tax Reform Act of 1986, which largely eliminated the 80% deduction they were able to take for holding tax-exempt bonds, have steadily cut their holdings of municipals by not replacing them as they are redeemed or mature.

Property and casualty insurers, which saw municipal assets grow by $1.6 billion, to $139 billion, during the first quarter, were the third largest holders of tax-exempt securities.

The gains signal an improvement since the end of 1992, when the insurers saw tax-exempt assets slip $400 million.

The increases are surprising, some analysts said, because property and casualty insurers have been large sellers of municipals in the past year, in part to raise cash to cover losses from natural disasters, such as hurricanes.

However, one reason for the modest increase in assets in the sector is that some insurers, especially small- to medium-sized companies have been buying municipals instead of taxable securities as part of their crossover buying strategies, said Michael Shamosh, municipal strategist at Cowen & Co. in New York.

"They're buying municipals because they look cheap," Shamosh said.

One municipal salesman pointed out that at least three of his clients, medium-sized property and casualty insurers, have been purchasing tax-exempts this year.

"Municipals are cheap," he said, which is a reason he would recommend that customers purchase them.

Overall total municipal debt outstanding increased by $10 billion to $1.16 trillion.

During the first quarter, several sectors had stable municipal asset levels.

The assets of nonfinancial corporate businesses were stable at $11.6 billion. Savings and loans and state and local government retirement funds each had municipal assets of $900 million, unchanged from yearend 1992. In addition, private pension funds' assets held steady at $4.4 billion.

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