Securities Law

Muni Bond Trades Slip in 2012


Municipal market trading activity in 2012 mirrored trends seen in 2011, with par value remaining largely unchanged and the number of transactions slipping slightly to less than 10 million, according to the Municipal Securities Rulemaking Board’s 2012 Fact Book that was released Wednesday.

The data shows that $3.2 trillion of par amount of muni bonds traded last year, down 1.8% from 2011 and continuing a slide that began in 2007, when $6.7 trillion in par amount of bonds changed hands.

The total 2012 par value of trades includes $1.6 trillion in customer purchases, which fell 3% year-over-year, and $975.5 billion in customer sales, which were down more than 10%.

The par value of interdealer trades actually increased between 2011 and 2012, climbing nearly 20% to $630.5 billion.

The report defines customer transactions as those between dealers and non-dealers, which can include retail or institutional customers.

There were 9.7 million total trades in 2012, down roughly 7% from 2011. The number of annual trades peaked at around 11 million in 2008.

The trades in 2012 included 4.1 million customer purchases, a 16% decline, and 2.1 million customers sales, down 1.5%, according to the data. The number of interdealer trades increased nearly 5% to 3.4 million.

The average trade size in 2012 was $332,110, up 5% from 2011.

MSRB director of research Marcelo Vieiri said the report’s results were not unexpected. “This year’s data is a continuation of last year’s trends. We didn’t see anything out of the ordinary or that was surprising,” he said.

The report said an average par amount of $12.8 billion traded daily in 2012, 8% of which was from trades of $100,000 or less, the range industry members and regulators typically classify as retail trades.

As in previous years, the trading of variable-rate securities declined year-over-year, with par value falling roughly 6% to $1.20 trillion and the total number of trades declining 18% to 220,903, the report said.

Trading of taxable munis also fell year-over-year, with par amount falling 7% to $272.8 billion and number of trades falling 3% to 733,332. The traded par volume of tax-exempt munis actually increased 3% in 2012 to $2.7 trillion, but the number of tax-exempt trades fell 6% to 8.7 million.

A section in the report on dealer distribution of trades showed that five dealers accounted for 53% of customer trades by par amount and 44% of the number of trades during the year.  Twenty dealers accounted for more than 80% of par value traded and nearly 70% of the number of trades.

New for the 2012 report is a graph that Vieira said shows the trading “life cycle” of municipal bonds. The graph compares customer trades to interdealer trades during one year following an initial bond sale, and it demonstrates that the majority of trades in the days immediately after a bond is offered are customer transactions.

For instance, the par amount of customer trades accounted for approximately 80% of total par amount that traded the day after a security was offered, according to the graph. Interdealer trades accounted for the remaining 20%.

Just a few days after a security is offered, however, the par amount of customer trades declines sharply to between 50% or 60%, before climbing to about 70%.

Another first for the 2012 book is that trading data is broken out by credit ratings for munis assigned by Standard & Poor’s or Fitch Ratings.

The EMMA system has shown credit ratings from the two agencies since November 2011, but the board does not have ratings from Moody’s Investors Service.

According to the report, AA-rated munis accounted for 53% of the average daily traded par amount of the rated bonds and A-rated bonds accounted for 24% in 2012. AAA securities accounted for 14% and bonds with ratings below investment grade accounted for 2% of the par amount.

Also new this year is yield data. The report shows that average daily yields for all trades in 2012 was 2.77%, down from 3.77% in 2011.

Smaller trades had higher yields. Trades under $25,000, for instance, had average daily yields of 3.10%, while trades from $100,001 to $500,000 had yields of 2.17%. Trades of more than $2 million had yields of 1.82%.

Revenue bonds issued by the Industrial Development Board of the Parish of East Baton Rouge, La., were the most heavily-traded by dollar amount during the year, with more than $33 billion of two maturities of the bonds changing hands in 1,089 trades.

The four most-heavily traded bonds by number of trades in 2012 were issued by the Commonwealth of Puerto Rico and its authorities. Among them was an issue of Puerto Rico public improvement refunding bonds that traded 25,938 times.



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