Wednesday, March 12, 2014

Municipal Bond Markups are Still Excessive

By Tim Husson, PhD, FRM and Craig McCann, PhD, CFA

Monday’s Wall Street Journal article, Muni Bond Costs Hit Investors in Wallet: Investors Pay Twice as Much for Municipal Debt as for Corporate Bonds, points out yet again that investors pay far more to buy and sell municipal bonds than they pay to buy and sell similar quantities of corporate bonds or common stocks. The article cites a recent S&P study that finds investors buying a $100,000 municipal bond pays an average spread of 1.73% or $1,730 – twice as much as the 0.87% average spread investors pay when buying a $100,000 corporate bond.

Last summer SLCG distributed an analysis of the markups and markdowns on over 20 million municipal bond trades. We estimated that investors have been charged $1 billion a year in excessive markups on municipal bond trades since 2005. Our study, Using Emma to Assess Municipal Bond Markups is available here. The SLCG report received significant coverage including The Bond Buyer article, Study Claims Billions of Dollars of Excessive Muni Markups.

Investors pay high markups on municipal bond trades because of a lack of pre-trade price transparency and post-trade markup disclosure. Simple disclosure requirements already in place in the corporate bond market would dramatically improve how the municipal bond markets operate for investors and taxpayers. The merits of such reform are now clear after a dozen published research papers on excessive markups in the municipal bond markets.

Current SEC Commissioner Mike Piwowar contributed an influential paper to this literature, “Secondary Trading Costs in the Municipal Bond Market” (download here), and has been outspoken about the need to provide investors better disclosure (see Bond Buyer profile of Dr. Piwowar here).

Those of you interested in getting up to speed quickly on the markup issue might click on our prior blog posts on the topic:

June 7, 2013 Welcome to Muni Markup Week on the SLCG Blog
June 10, 2013 Retail Investors and the Municipal Bond Market
June 11, 2013 An Example of an Excessive Muni Markup
June 12, 2013 Alternative Ways to Gain Municipal Bond Exposure
June 13, 2013 Markup Calculation Methodology
June 14, 2013 Muni Markup Week Wrap Up
December 18, 2013 Did UBS Charge its Proprietary Puerto Rico Bond Funds Excessive Markups?
January 6, 2014 Did UBS Charge its Proprietary Puerto Rico Bond Funds Excessive Markups? Part II

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