Municipal Securities Rulemaking Board data for recent years shows a steep decline in municipal bond trading by dollar volume but an increase in the overall number of trades.
The data reflects less liquidity in the market with the withdrawal of leveraged players such a hedge funds and more small-block trading by retail investors, according to experts.
In 2010 there were 10.49 million trades of muni securities, the second highest yearly total after reaching 10.98 million in 2008, according to the 2010 Fact Book the MSRB released Wednesday.
The data shows there were 9.18 million trades in 2007, and that figure rose to almost 11 million in 2008 before plateauing above 10 million for 2009 and 2010. However, the total dollar amount of munis traded dropped significantly, from $6.69 trillion in 2007 to $3.79 trillion in 2010.
Michael Decker, a managing director and co-head of the muni securities group at the Securities Industry and Financial Markets Association, noted how much the dollar volume of trading has fallen off since the beginning of the financial crisis.
“It’s clearly a lot less liquid market than in 2006 and 2007 when there was a lot of leveraged buyers, principally hedge funds and tender-option bond programs, and financing those programs was relatively easy,” he said.
Asked if that level of liquidity will come back, Decker said: “I don’t think easy financing for trading positions is going to come back, at least no time soon.” He pointed out that before the financial crisis, there was a credit bubble and that has disappeared.
The higher number of smaller trades shows a strong retail presence in the market, according to experts.
“The first thing that came to my mind was, we’ve heard … there’s a very strong retail participation in the market and a larger number of trades at smaller sizes seems to indicate this retail activity,” said Marcelo Vieira, the MSRB’s director of research.
The MSRB report also shows that retail investors, who typically make trades amounting to $100,000 or less, account for just over 81% of the number of trades but only 7.3% of the dollar amount traded.
Taxable bond trades jumped in 2010, reflecting the popularity of Build America Bonds. The number of trades of taxable bonds rose to 1.14 million in 2010 from 567,999 in 2009.
The dollar amount of variable-rate bonds traded, which fell off a cliff in 2008 and 2009, was up slightly in 2010. That shows the market for such debt has leveled off, Vieira said. Roughly $1.58 trillion of variable-rate bonds traded in 2010, compared to $1.49 trillion in 2009 and $3.1 trillion in 2008. That compares to $4.6 trillion in 2007.
California’s Series A-2 revenue anticipation notes were by far the most actively traded municipal security, with 17,232 trades last year. The next most actively traded were Illinois Series 2010-1 BABs, with 7,310 trades. Texas’ tax and revenue anticipation notes had the highest trading activity based on dollar amount, with 488 trades totaling $19.02 billion.
Five dealers accounted for roughly half the muni trades, by both dollar amounts and numbers of trades in 2010. The data shows five dealers accounted for 53.1% of trades by dollar amount in 2010, compared to 50.3% in 2009. Ten dealers accounted for 71.7% of the dollar amount of trades last year.
In terms of numbers of trades, five dealers accounted for 43.9% in 2010, compared to 48.7% in 2009. Ten dealers accounted for 59.1% of the number of trades last year.
The time of day for trades shows huge swings upward around 10:30 to 11:00 a.m. Eastern Standard Time, showing West Coast traders jumping into the market. The average number of trades during the day leaps above 1,000 around 10:30 a.m. and stays above that number through about 4:45 p.m. The average dollar volume of trades only jumps above $800 million once during the day — at $1.3 billion for 15 minutes after 11:00 a.m.
The data also illustrates that the muni market is still very much a buy-and-hold market. There are more investors buying than selling, both in dollar volume and number of trades. Last year there were 5.25 million of customer purchases, compared to 2.01 million of customer sales.
“One could infer that once all of the buying and selling is done, people are just holding [the bonds] until the very end,” Vieira said.
The data shows that once municipal bonds are issued, there is a lot of trading within the first month, then trading falls off and is almost flat at the 10-year mark. Munis typically have call dates at 10 years and the data shows investors continue to hold them if they are not called in the 10th year.
