Household ownership of municipal bonds catapulted over the $1 trillion mark for the first time ever in the first quarter of 2010. Meanwhile, foreign investors seeking a greater footprint in the municipal market via taxable Build America Bonds held $71.9 billion in their largest-ever presence in the market, according to new Federal Reserve data released yesterday.

Households held $1.02 trillion — roughly 35% — of the $2.834 trillion in outstanding municipal debt through the end of the quarter that ended March 31. Although households only increased their assets by 2.1%, or $21.3 billion, from $998.9 billion they held at the end of the fourth quarter of 2009, the latest milestone pushed the sector closer to doubling the $531.2 billion it owned in 2000.

Foreign buyers — enticed by the abundance of high-yielding taxable BABs — increased their holdings 18.8% to $71.9 billion from $60.6 billion in the fourth quarter of 2009. It was a jump of 79.9% — or $31.9 billion — compared to their holdings at the end of the first quarter of 2009 and nearly 10 times the amount of muni debt they held in 2000, well before Congress created BABs as part of the American Recovery and Reinvestment Act in 2009.

“We are not surprised by the greater foreign participation in the municipal market as the Build America Bond program continues to find institutional demand from overseas investors looking for additional yield without substantial amounts of credit risk,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York City.

“The trend continues to be positive overall for investor participation to broaden out globally for BABs” going forward, he said.

Pietronico was less enthusiastic, however, about the household sector’s holdings rising to more than  $1 trillion.

“Cash-alternative yields are so small that this could be a temporary thrust higher subject to a massive reversal should interest rates spike higher,” he said.

Still, households have been the largest owners of municipal debt for at least the last 10 consecutive years — steadily increasing their assets year after year.

Broker-dealers and exchange-traded funds also had noticeable increases in their holdings of municipal debt in the quarter, rising by 13.9% and 11.1%, respectively, when compared to the fourth quarter.

With $40.3 billion in holdings, broker-dealers grew their ownership by $4.9 billion from $35.4 billion they held in the previous quarter.

ETFs, meanwhile, captured $6.5 billion of muni assets, up from $5.9 billion in the prior quarter, but a substantial rise of more than double its $3.1 billion held in the first quarter of 2009.

Muni ETFs first appear in the data in 2007, with holdings of $700 million.

Mutual funds and money market funds continued to hold their position as two of the largest categories to own munis, besides households and property and casualty insurance companies.

Money funds slid 8.1% over the quarter due to paltry yields that sparked massive outflows among investors looking for higher-yielding alternatives.

By comparison, mutual funds, driven by steady inflow activity, owned $500.7 billion — up $20.5 billion or 4.3% from the $480.2 billion they held in the fourth quarter of 2009.

Money market fund ownership fell $32.6 billion to $368.7 billion from $401.3 billion in the final quarter of 2009, in line with the 114% drop in holdings from $482.7 billion in the first quarter of 2009.

Property and casualty companies, meanwhile, ended the quarter owning $372.8 billion — $3.4 billion, or 0.9% more — than the $369.4 billion they held at the end of 2009.

The modest increases compare to a decline of 0.8%, or $2.9 billion, compared to $375.7 billion the insurance companies held in the first quarter of 2009.