Friday, March 13, 2015

2015 Municipal Securities Trivia: 10 Things You Should Know

It is difficult to overstate the importance of the municipal securities market. There is perhaps no other market that so profoundly influences the quality of our daily lives.      
-SEC Commission Luis A. Aguilar
The municipal market is officially on the radar of regulatory agencies as noted by the words of Securities and Exchange Commissioner Luis A. Aguilar in a recent speech entitled Statement on Making the Municipal Securities Market More Transparent, Liquid, and Fair. Aguilar uses the speech to discuss current updates in regulation which you can read about in the article New Regulatory Developments In The Muni-Market on SeekingAlpha.

To best appreciate the changes coming to the market we've created a little muni-trivia for you. Listed below are 10 things about the municipal market that we bet you didn't know. 
  • According to one BlackRock study, there are 78,000+ potential issuers of municipal securities ranging from small school districts to water authorities and states.
  • The muni market is less than half the market size of corporate bonds by principal outstanding.
  • Muni's are estimated to maintain 20x more types of issuance's, i.e. variations in cash flow, pay type, etc, than corporate bond types. The existence of so many unique offerings increases risk in the market which reduces liquidity and impedes trading.
  • One-third of all municipal bonds trade only once after the initial offering or distribution period;
  • 5% of all muni-bonds trade only once every twelve years.
  • According to one study, conducted between 2009 and 2013, individual investors traded ~$915 billion muni -bonds and paid brokers ~1.73%, approximately double the spread paid for corporate bond transactions during the same period.
  • According to one working paper, it is twice as expensive to trade New York muni bonds as it was in the 1920s.
  • As of the end of 2014, only 6% of newly issued muni's had municipal bond insurance.
  • Municipal securities are exempted from SEC registration as well as periodic disclosure requirements with uniform accounting standards.
  • According to Fitch, asset managers have increased municipal holdings by 57% since 2007 and now hold 20% of all outstanding muni-bonds.
The recurring them here is liquidity and pricing; the SEC views lack of regulation as the primary driver behind these issues. Investors should expect to hear more about ways the federal government is looking to not only regulate, but support, the muni-market. The net effect is greater liquidity and a more robust market for investors.