Muni Bond Market Debt at 5-Year LowAuthor: David GoldsteinLast Updated: December 12, 2014 During the third quarter, the municipal bond market in the United States contracted $3.63 trillion, which in a five-year period was the lowest amount of debt outstanding, this according to data from the Federal Reserve Bank.Just slightly less than the second quarter was the total at which time there was $3.66 trillion in debt. In 2013, the size of the market was $3.68 trillion and for 2012’s third quarter, $3.72 trillion.In the fourth quarter of 2010, the municipal bond market had hit a high following a rush to sell Build America Bonds, pushing outstanding debt to $3.77 trillion. At that same time, interest rates were dropping, making cities, counties, and states eager to refinance and borrow while the market remained close to $3.7 trillion.However, when a decline in interest rates began over a year ago, the binge for borrowing stopped. The market has diminished steadily since, falling from the first quarter of last year by 2.6% from 2013’s first quarter.It appeared that retail buyers demand was also declining in the third quarter with municipal bonds worth $155.5 billion dropping for households. Based on the flow of holdings for municipal bonds, the Federal Reserve makes adjustments for seasonal variations.For the 15th consecutive quarter, households, which represent the biggest investors in the municipal market, discarded holdings. Retail buyers in the second quarter also dropped bonds totaling $34.7 billion.In addition, there was a boost in buying from institutional investors. In the third quarter, $34.4 billion in municipal bonds were acquired by banks, following second quarter buys of $17.4 billion. During this same quarter, $60 billion was acquired by mutual funds and in the prior quarter, $48.7 billion. As far as life insurance companies, $4.8 billion was acquired and for property casualty insurance companies, $2.6 billion.There is a chance that in the near future, outstanding debt contraction could pause as another decline in interest rates for municipal bonds begins.Yield on a top-rated 10-year bond is now 78 basis points below where it started in 2014, this according to Municipal Market Data. For a highly rated 30-year bond, yield has declined dramatically, not lower than on the first trading day of this year by 130 basis points.An industry group forecasted last week that in 2015, total issuance could climb from the $348.1 billion that was estimated for this year to $357.5 billion.