The U.S. municipal bond market shrank to $3.686 trillion in the third quarter of the year, the smallest since the end of 2009, from $3.721 trillion in the second quarter of the year, according to Federal Reserve data.

Households held $1.64 trillion in bonds in the quarter, the lowest since the final quarter of 2006 and less than the $1.67 trillion they held in the second quarter, according to the report on the country's financial accounts.

Individual investors rushed for the municipal market's exits in the middle of the year on fears about the end of the Federal Reserve's stimulus program, Detroit's historic bankruptcy filing and the financial soundness of Puerto Rico.

Along with selling off individual bonds, they also fled municipal mutual funds. The funds dropped $81.9 billion worth of bonds in the quarter, the largest amount shed on records going back to 1976.