During the first quarter of 1991, households experienced the second-largest decline in tax-exempt assets in the history of the municipal market, according to the Federal Reserve.

Net reductions in household holdings reached $ 10.3 billion, a 149% increase over the $ 4.12 billion that left direct retail portfolios in the fourth quarter of 1990, according to the Federal Reserve's Flow of Funds Accounts. The largest household asset reduction on record was $ 12.75 billion in the third quarter of 1986, when tax reform was sending shock waves through the market.

The Federal Reserve's data are preliminary and, for households, residual -- meaning revisions to other sectors affect the household category. Municipal analysts say the numbers must be taken with a grain of salt, since subsequent revisions can alter the picture.

But even the typical degree of change does not affect the gravity of the first quarter's preliminary data. The fourth quarter's household figure was revised downward 20%, from $ 5.2 billion, and if the same change were applied applied to the first quarter, the sector's loss would still be the second-largest ever, at $8.24 billion.

Municipal analysts said the sheer volume of declines means a host of investment considerations are combining to discourage the direct retail buyer from loading up on tax-exempts. First and foremost is the mounting impact of maturities and calls.

Thanks to these events, the first quarter also has the singular status of being the first three-month period when total outstanding tax-exempt assets actually fell. Despite more than $30 billion in new-issue, long-term bonds and more than $5 billion of short-term debt, total tax-exempt assets declined $127 million, according to the Federal Reserve.

"It could be there are fewer munis around," said Peter J. Fugiel, vice president of research at John Nuveen & Co. "Still, that's an awful lot of bonds just to get called."

George Friedlander, managing director and fixed-income strategist at Smith Barney, Harris Upham & Co., said the rising tide of calls from issues sold in the early 1980s is taking its toll. But an influential force for the direct retail buyer, versus the mutual fund investor, is today's comparatively low rates.

"Direct retail has been very resistant to going out in the long-term market," Mr. Friedlander said. "The individual tends to be more sensitive to rates. He will say, 'I could get 8% in the past, why should I buy 6% now?' And he may leave the money in short-term instruments."

Many municipal bond buyers, as a result, could be using tax-exempt money market funds as "a parking place" until rates become more attractive, Mr. Friedlander said. In fact, the Flow of Funds Accounts shows a sharp 44% increase in money markets' tax-exempt assets, to $6.69 billion in the first quarter from $4.64 billion in the fourth quarter of 1990.

The other major factor contributing to a waning of direct retail holdings is the emergence of mutual funds -- particularly the closed-end bond funds -- as powerful institutional

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buyers. The funds bought so many bonds in the primary market, very few bonds were left for individuals in the first quarter, according to Larry Liebers, municipal coordinator for Merrill Lynch & Co.

"Retail buyers can't get new issues because of the packaged products," Mr. Liebers said. "In many instances, regular bonds are not a retail product any more."

"Bond funds totally dominated the demand side of the market," Mr. Friedlander said.

The traditional municipal buyer is still a force in the market, Mr. Liebers said, but the investment industry is corraling him into the funds partly because direct purchases aren't as lucrative. "Spreads are so razor thin that it's a losing transaction for the investment adviser or broker," he said. "And everyone makes more in a packaged product, the manager, the broker, the firms themselves.

"In the big wire houses, they are steering everybody into the packaged products," he added. "In my opinion, more people are actually buying tax-free bonds than ever before."

A recent example of retail being shut out due to mutual fund demand is this month's $675 million New York City general obligation sale. Market sources said John Nuveen & Co. -- by the far the biggest presence in the closed-end fund sector -- and other institutions smothered the deal with buy orders.

Nuveen's impact on the market is enormous. So far this year, the firm has raised about $3.3 billion by selling common and preferred shares of closed-end funds. Just this week, the Nuveen Quality Income Fund raised $750 million in an initial public offering, according to a spokesman.

Mr. Liebers noted that a large part of the closed-end funds' appeal is the legitimacy conferred by a New York Stock Exchange listing. "People like to look at the Big Board and see their Nuveen fund; its a comforting feeling," he said.

Other factors contributing to the huge asset-decline in the household data from the Federal Reserve include a corresponding surge in equity market buying and reporting delays for the property/casualty sector, according to Mr. Friedlander.

Throughout the Persian Gulf war, the stock market rally drew cash from individuals, perhaps the same funds that had matured or been called, he said. The sales growth of stock mutual funds affirms that money was indeed pouring into the sector. According to the Investment Company Institute, net sales of equity funds -- subtracting redemptions and reinvested dividends -- shot up 88% to $4.63 billion in the first quarter, from $2.46 billion in the fourth quarter of 1990.

Further, Mr. Friedlander said he expects the household tax-exempt assets number to improve in subsequent revisions because the property/casualty data tend to be erratic in the preliminary reports. "My guess is that by the time the numbers have settled, the property and casualty data will be more negative and the household will be less negative."

On the other hand, the revision affecting the fourth quarter household figures was a reduction in the assets held by brokers and dealers, not insurance companies, according to a spokeswoman at the Federal Reserve.

As it stands, the property/casualty sector slowed their tax-exempt buying again in the first quarter. After a fourth-quarter uptick to a $321 million asset increase, the insurers increased holdings by only $279 million in the first three months of this year.

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