MuniLand

A few times a year, the Municipal Securities Rulemaking Board releases its trade data, giving the rest of us a chance to peer into the murky municipal bond market. Yesterday, we got access to the data for the first quarter of 2012, and a few interesting facts jumped out.

Revenue bonds, or debt issued with the backing of dedicated streams of payment from specific operations, trade a lot more than general obligation bonds. This makes sense because revenue bonds accounted for 69 percent of the municipal debt outstanding as of Mar. 31, 2012, according to Bloomberg. From retail-size trades of less than $25,000 to mid-market ones of up to $2 million, revenue bonds trade at about twice the par of general obligation bonds, or bonds with the “full faith and credit” backing of a governmental entity that has the authority to tax. Once trades become institutional, that is, exceed $2 million, demand triples for revenue bonds. Revenue bonds seem to be much more popular among institutional buyers like pension funds, mutual funds and insurance firms than general obligation bonds.

Within the revenue bond category, we can drill down further into the various sectors. For bonds with a fixed interest rate, the most traded sector was education. For floating rate securities, healthcare debt was most heavily traded in the first quarter.

Among the top 50 traded securities, Puerto Rico bonds dominated the list with approximately one-third of the par traded. Puerto Rico issued $5.3 billion of debt in the first quarter of 2012, and investors traded $22.4 billion of its securities. This is a remarkable showing given that Puerto Rico has the lowest rating of any U.S. state or commonwealth. The island is an exceptionally heavy issuer, having floated 7.45 percent of all long-term municipal debt in the first quarter of 2012 even though its economy only represents 0.4 percent of U.S. GDP. I’ll be looking more closely at its balance sheet.

The two most actively traded municipal bonds in the first quarter of 2012 were industrial revenue bonds issued for Exxon Mobil. These are variable rate bonds paying the holder an interest rate that resets daily; lately it has been as low as 0.04 percent and as high as 0.20 percent. It’s a little unclear why these bonds are trading daily. That part of muniland is still a little murky.

In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.

The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.

From Bonddesk’s December Transparency Report I pulled the data for these charts showing the seven most actively traded states’ bonds. Bonddesk uses “investor buys” data, which represents trades that end up in a retail investor’s account. In the bond markets there are often many trades between broker-dealers before the securities land in an investor’s account, so Bonddesk scrubs the data to show the real level of investor demand.

Blogging politicians

The House Financial Services Committee is blogging!

Right on!

Here is why they are doing it:

We believe that during this time of ongoing economic uncertainty there are questions being asked that are not being answered. We believe there are areas of financial services regulation and housing policy that are being overlooked which demand scrutiny.

We believe that there is a need for clear, concise appraisals of policies and ideas as opposed to “inside baseball” commentary.

We believe there are reporters, congressional staff, advocates, academics, constituents, and Members of Congress who have interest in financial issues, but don’t necessarily have the time to do the digging, and we hope this blog makes it easier.

My fellow Reuters blogger Felix Salmon  wrote about his lunch with the bond fund managers Loomis Sayles yesterday.

Bond fund managers generally are not keen on self directed investors. They believe that they are the best managers of investors’ fixed income assets. And some of Felix’s blog post reflected that.

The darkness and complexity of bond markets has served bond mutual funds well.  Generally retail investors, unless they have high net worth and a knowledgable advisor or broker, tend to allocate the “fixed income” portion of their assets into bond funds.  This is unlike the equity markets, where many investors feel confident buying individual stocks.