Municipal Bond Markets

As with stocks, there is both a primary and secondary market for municipal bonds. In the primary market, municipal bond issuers sell their bonds to investors. In the secondary market, investors buy from or sell to other investors. But to successfully invest in bonds, you need information, and there are several official sources of information on municipal bonds.

The Primary Market for Municipal Bonds

The Bond Buyer is the official website for the primary municipal bond market, providing information about new municipal bonds, including these statistics:

Market Information on Municipal Bonds

There are more than 1 million municipal bonds. The Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that oversees U.S. broker-dealers, provides the Trade Reporting and Compliance Engine (TRACE) to report over-the-counter trades in fixed income securities but not municipal securities. But the Municipal Securities Rulemaking Board (MSRB), which regulates the municipal securities firms, banks, and municipal advisors that deal in municipal securities and advisory activities, provides a tool like TRACE for municipal bonds called EMMA (https://emma.msrb.org/), which provides free comprehensive online information about municipal bonds for retail investors, including:

Brokers and dealers use the Real Time Reporting System (RTRS) operated by the MSRB to report trades of most municipal securities.

The EMMA website provides free public access to municipal security documents and data. Investors, state and local governments, and other market participants can get key information about individual municipal bonds and access tools to assess bond prices and market trends.

Information is provided on specific municipal securities, such as:

Additional information is also provided about the municipal bond market:

The MSRB is a Congressionally chartered, self-regulatory organization governed by a board of directors, subject to oversight by the Securities and Exchange Commission, which designated the EMMA website as the official repository for municipal securities disclosures in 2009.

MSRP also provides an extensive library of resources for investors, a place where you can learn all about the municipal bond market.

Secondary Market for Municipal Bonds

The secondary market of municipal bonds is in the over-the-counter (OTC) market, so many of the rules governing OTC transactions also govern municipal bond transactions.

Municipal bonds are priced on a yield-to-maturity basis rather than a dollar price, which is called a basis quote. Municipal revenue bonds, which are usually callable, are called dollar bonds because their prices are quoted as a percentage of par value. So, a quote of 105 would mean that the bond is selling for $105 for every $100 in par value.

There are several types of quotation for municipal bonds in the secondary market:

Regulation of Municipal Bond Dealers

Large brokerages maintain a municipal bond department that may sell to customers or to other bond dealers. A broker's broker acts as an agent for other institutional customers, such as major institutions or even other brokers. The identity of customers is not disclosed nor do these brokers maintain an inventory of bonds since they act only as an agent.

When a dealer acts as an agent, it charges a commission for the transaction. If the dealer acts as a principal, then the bonds are bought for his own inventory, charging a markdown when securities are bought from customers, or the bonds are sold from his own inventory, charging a markup when the securities are sold to customers.

A group of investment bankers may create a secondary market joint or trading account to purchase large blocks of bonds from institutional issuers to resell. Participating firms sign agreements containing the terms and conditions in which the joint account will operate. The secondary joint account agreement creates the account, identifies the participating dealers, specifies the lead manager, the securities to be purchased, and any other terms and conditions of the account. All account members must sell the bonds at the same price and the account must be settled within 30 calendar days after the municipal bonds are purchased and delivered to the secondary joint account members.

Selling Municipal Bonds to Consumers

As with selling securities to the investing public, regulations specify the conditions under which such sales can be made. The MSRB requires the suitability test to be applied to discretionary accounts and other accounts. Municipal bonds are also more suited for people wanting income as an investment objective. Tax-free municipal bonds are more suitable for higher-income taxpayers, and they should not be placed in tax-advantaged accounts such as IRAs or 401(k) plans.

If a municipal securities firm has a control relationship with the issuer of the municipal bonds, then this must be disclosed, such as when an officer of a municipal dealer sits on the board of directors of an issuer. Disclosure can be verbal at first, but it must be written before the transaction is completed.

Dealers cannot guarantee customers that they will earn profits or will not suffer losses nor can the dealer share in the profits or losses of the customer's account, unless an Associated Person has a personal joint account with a customer and gets written permission from the firm, and the profits and losses are proportional to the amount of capital that the Associated Person has contributed to the account.

The net price charged in a principal transaction must reflect the dealer's best judgment of the fair market value of the security, the expense of the transaction, the total dollar amount of the transaction, and the value of any security exchanged or traded. However, markups and markdowns are not disclosed to the customer at confirmation.

The commissions earned from an agency transaction must consider the availability of the securities, the expense of executing the order, the value of any services rendered, and the amount of any other compensation received or to be received with a transaction. The dealer as agent must make a reasonable effort to get a fair and reasonable price. Trying to increase commissions by churning is prohibited. Churning occurs when the dealer frequently buys or sells securities for the primary purpose of earning more commissions.