Holdings of tax-exempt securities by retail households rebounded tremendously in the second quarter of 1991, with $4.064 billion municipals flowing into the retail sector.

The apparent buying activity is a sharp contrast to the first quarter of 1991, when the household sector shed $9.29 billion. The data are compiled by the Federal Reserve Board's Flow Funds Accounts and are preliminary, unadjusted calculations.

The household data are subject to the most volatile quarter-toquarter adjustments because the numbers are "residual," or compiled from whatever bonds are left over after the other sectors have reported their holdings. The first quarter 1991 outflow was adjusted downward 9.8% to $9.29 billion from $10.29 billion.

Retail buyers reportedly increased their holdings of tax-exempt bonds due to sharp decline in short-term investments' yields -- such as tax-exempt money market funds, certificates of deposit, and government funds -- a recognition at the time that, given the onset of the recession, rates could be headed lower, and the abatement of fear over the Persian Gulf War.

Indeed, that investors switched out of municipal money funds is confirmed by a $3.064 billion outflow of assets from that sector. In the first quarter, when international uncertainties sent investors to the refuge of short-term debt, individuals increased theri money fund holdings by $6.69 billion.

Mark Tenenhaus, vice president of reserach at Dean Witter Reynolds Inc., said the retail about-face is a clear sign that the current market is enjoying strong demand from individuals. He pointed out that the first quarter's data were affected by bond calls, redemptions, and maturities taking place on Jan. 1, which may have tilted that period's results.

"The nert outflow in the first quarter in large measure reflects the Jan. 1 activity," Mr. Tenenhause said. "But the second quarter inflow shows that [individuals] are still buying bonds. the market is strong even at today's levels, which are rich."

Although July 1 activity is likely to dent the thirf quarter flows, he added, "We would be surprised to see an outflow. The individual buying remained strong in July."

In fact, the household rebound confirms what industry analysts have been calling the theory of "diminishing supply," which holds that retirement of old debt, especially from the high-interest days from 1981-85, will outspace new issuance for the next several years, Mr. Tenenhaus said.

"Even with the decline past the magic 7% threshold," he said, "we have not noticed a real decline in retail participation. Retail buyers recognize that bonds are in short suppl and that replacement bonds are going to be difficult to find in the next few years."

The flight to assets out of municipal money market funds is attributable simply to the startlingly low yields available in that sector, according to Richard H. Lowes, vice president of municipal research at Harris Trust & Savings Bank in Chicago.

"Short-term rates were so very low that people had to look for better yields by extending maturities," Mr. Lowes said. "There's no question about that."

In fact, municipal money funds performed abysmally in the second quarter. During the period, the average yield of the 122 general short-term, tax-exempt funds tracked by Lippr Analytical Services Inc. was only 10% for an annualized return of 4.04%.

Another significant second-quarter result appeats in the property-casualty insurance sector of the market. The insurers added $832 million to their net tax-exempt assets, up from a $279 million increase in the first quarter, and the largest surge for these firms in more than two years.

Analysts attributed the uptick to profitable trading opportunities. Although the data show this sector as pruchasing the bonds for a specific time frame, the same securities are highly likely to end up in retail hands within the following four months.

"The institutions look at munis as trading vehicles," Mr. Tenenhaus said. "Some of those bonds were let out in the third quarter and found their way to retail portfolios at marked up prices."

Two long-term, established trends were confirmed by the second-quarter data. Municipal bond funds, which have benn on the march since inception in 1961, continued an uninterrupted accumulation of tax-exempt assets. More than $6.35 billion of tax-exempts flowed into the sector, up 17% from a $5.27 billion increase in the first quarter.

And commercial banks continued their inexorable shrinkage of tax-exempts, with ner outflows of $4.58 billion, up 15% from the $4.09 billion of asset reduction in 1991's first quarter, according to the Federal Reserve.

The Fed's Flow of Funds data were collected by The Bond Buyer prior to the release of the full statistical publication. Additional information concerning each sector's total unadjusted municipal holdings will be published by The Bond Buyer next week.

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