Muniland is the most transparent bond market

July 1, 2011

Agnes Crane, a columnist for Reuters Breakingviews, wrote an interesting column today about ending the municipal-bond tax exemption. This tax exemption, granted at the federal level, makes the interest earned on municipal bonds free from taxation on the local, state and federal level if it’s owned by an investor residing at the place of issuance.

The “triple tax” exemption is baked into the structure of the municipal market. There are several proposals floating about how to modify the muni tax exemption. Agnes Crane, in her column, calls it an “accident of history.” Accident or not, there are 50,000 muni issuers who will actively resist any legislation to change the tax code. It’s hard to imagine any lobbying group with more clout since state and local officials are deeply embedded in the political web of every federal legislator’s district. But politics being what it is, every legislative term brings new possibilities.

But what I really wanted to write about was Agnes’ idea that repealing the muni tax exemption would make the muni bond market more transparent and efficient. The municipal bond market is already miles ahead of other bond markets in transparency. Since the Municipal Securities Rulemaking Board made their EMMA system operational, transparency in muniland is an order of magnitude better than other any bond market, including the U.S. Treasury market, which is liquid but not transparent. To see individual trades in the Treasury market you need an expensive Bloomberg or Reuters terminal. But for the muni market all you need is an internet connection to reach EMMA. At EMMA you can easily get all the documents for an issuer and their individual bonds, credit-rating downgrades, annual issuer reports and more.

Here is how the MSRB describes EMMA:

The Electronic Municipal Market Access system, or EMMA, is a comprehensive, centralized online source for free access to municipal disclosures, market transparency data and educational materials about the municipal securities market.

The Electronic Municipal Market Access (EMMA) website was established to increase the broad comprehensive access to vital disclosure and transparency information in the municipal securities market.

EMMA provides investors with key information about municipal securities, free of charge. The information on EMMA is presented in a manner specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters. EMMA is the sister to the SEC’s corporate disclosure system, EDGAR.

See a 5 minute intro to using EMMA:

Many people still don’t understand muniland. That is fair, but as more commercial and non-profit groups find ways to use the powerful resources of the EMMA system and make useful interfaces, people will become more comfortable with muni bonds. And that muni tax exemption repeal? It might or it might not be a good idea, but most muniland experts agree it will only affect bonds that have yet to be issued. So have a look at muniland. It’s a rising asset class and deserves a little exploration.

One comment

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Stating that one bond market is more transparent than another is a straw man argument. The real question is: are bond markets sufficiently transparent?

As a commercial entity ( trying to make use of available data, I have to point out while the EMMA facility is useful, two existing structural features of the municipal and corporate bond markets are blocking transparency in the bond markets:

i. Bonds are denoted for trading purposes using CUSSIP numbers. Use of these numbers are licensed by Standards and Poors (under an agreement with American Banking Association ABA) to third parties. My estimate based on S & P’s website is that it would cost 90K (US) a year to get a complete license for these numbers. Having a CUSSIP license is a requirement of any third party that would like to re-publish the information from EMMA. Imagine if every website with a stock quote had to pay a similar fee to use the ticker symbol.

ii. The over the counter (or dealer to dealer) nature of the bond market substantially impairs accurate price discovery, increases cost, and creates a conflict between the dealers and their customers. With the technology available today, the only reason not to move to a an exchange trading system are the profits to the existing players.

While these two structural issues exist, the lack of transparency means that the bond markets are not working in the interest of investors.

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