Unable to shed a downward trend that first began early last year, ownership of municipal bonds by households fell to the lowest level in two years as it continued to decline in the fourth quarter of 2011, according to quarterly data recently released by the Federal Reserve Board.

Some investors were spooked by negative media reports about potential municipal bankruptcies or defaults, or turned their noses up at low interest rates, poor liquidity, and a crippling supply crunch, according to municipal experts. Others were sidelined by overall volatility in the financial markets, feared domestic fallout from the turmoil overseas, or caved to the pressure from a more attractive stock market, they said.

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