(Bloomberg) — Retail investors, who hold the largest share of municipal bonds, are paying about twice the spread paid by large institutional investors when trading recently issued debt.
The Municipal Securities Rulemaking Board measured the spread between prices for transactions in the primary market and recent transactions in the secondary market. The results showed that transactions valued at $100,000 or less, an indicator of retail buyers, brought an average spread of about $10, while transactions valued at $1 million or more brought a spread of $4.42, according to a report released Monday.
Retail investors who add bonds to their portfolios rely heavily on the secondary market, where there is brisk trading in the weeks following a new issue before transactions tend to die down. The price an investor receives can determine the return they receive for decades.
The report found that only 8% of the nominal value acquired through large transactions occurred in the secondary market, while the share was almost half that for smaller transactions. The researchers used data from a five-year period from 2019 to 2023 and measured spreads on purchases that occurred in the first seven days of secondary trading.
Spreads varied from year to year and differed significantly between competitive and negotiated deals. For competitive deals, the average spread was $4.16 and for negotiated deals, the average spread was $11.30.
“We don’t think this means issuers should flock to the competitive market,” said John Bagley, chief market structure officer at the MSRB and one of the report’s authors. In general, competitive transactions tend to come from larger, better-known issuers.
Investors who place larger orders can get more attractive prices, which reduces the profit underwriters make when issuing bonds to the market. In highly competitive transactions, the average spread on large transactions was only 27 cents, and in 2022 and 2023, when interest rates rose, the spread was negative.
“If you got a competitive offer at auction and didn’t sell it right away and the interest rates were against you, you probably had to lower the offer to sell it,” Bagley said.
– With support from Amanda Albright.
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