It comes as no surprise to those who understand markets that the less liquid a product is, the more its price will decline in a fast market rout. This has happened over the last few days in the municipal bond market.
The buying and selling of individual municipal bonds can be especially illiquid for retail investors because they don’t have much real-time market data. More importantly, they face very steep transaction costs, or markups, that dealers put on bonds sold in small lots. I wrote about this last week:
Securities and Litigation Consulting Group of Fairfax, Virginia, recently published a report that analyzed almost $3.7 trillion worth of municipal bond trades that happened between 2005 and 2013 (page 8). SLCG found that the median markup for a trade up to $25,000 in size is 1.79 percent.
Although markups are a drag for most retail customers, there was an approximately 30 percent increase in customer buys on June 24. Customer buy orders climbed to 24,897, according to MSRB data, from the 30 day average of 17,699. Although the par amount of customer buy trades on June 24 was $5.2 billion – almost the same as the 30 day average. There were more, smaller, buy orders, and this generally reflects increased retail investor activity.
Although the number of customer sell trades was only slightly higher than the thirty-day average, we saw a big increase in the par amount traded. It grew from a 30 day average of $3.4 billion to $5.4 billion on June 24. This tells us that institutions were heavy sellers. We know this from the size of the bid lists that were circulating among dealers. These are lists of securities offered for sale.