Muniland’s changing landscape

March 9, 2013

Want to take a 30,000-foot flyover of municipal market trading? The Municipal Securities Rulemaking Board has published its 2012 Fact Book. Let’s have a look at some of the highlights.

By every metric, municipal bond trading has been declining since the first quarter of 2008:

In the meantime, yields on municipal bonds, in lockstep with U.S. Treasury yields, have been declining since the end of 2008. Note also the separation between the customer-bought trades  (blue line) and customer-sold trades (black line). This is the difference (or spread), and it equals the revenue earned by dealers on transactions. This spread has widened since 2011.

Who is earning those revenues? Looking at the data based on the par amount traded (which is the total bonds traded by dollars) we see the five largest dealers did 52.9 percent of the business.

When we look at the trading by the number of trades, the market share for the five largest dealers drops to 43.8 percent. Of course, the biggest dealers are doing the big, institutional trades and the other dealers are doing a higher volume of smaller trades.

It’s a common saying in the bond market that 90 percent of bonds “are put away” after being issued (they are never traded). In this chart we see that most trades happen in the first month after sale and then drop dramatically.

This chart zooms down to the first year-after sale. Note the broad light blue band at the top that represents the trades of interdealer brokers who often stand between dealers in trades and take their spread.

This is a helpful look at the credit quality of the bonds that are trading. It somewhat mirrors the average distribution of credit ratings.

Which bonds are the heavy traders? Individual Puerto Rico bonds lead the pack, which could be because they are triple tax-free in all 50 states. But California, Florida and Texas had much higher daily levels of trades (page 83). So something else is happening with Puerto Rico. Stay tuned.

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