By Joe Mysak
Aug. 10 (Bloomberg) -- Almost all secondary market sales of new municipal issues occur within the first 30 days of pricing, with a network of buyers reselling the bonds to make quick profits getting them into the hands of individual investors.
The CHART OF THE DAY, taken from the Municipal Securities Rulemaking Board’s 2008 Fact Book, depicts this pattern of new municipal bond trades.
Underwriters sell the bonds in large blocks or amounts to so-called favored institutional investors, such as mutual funds, who in turn sell them to other buyers, who sell them to individuals, the “retail” crowd. Traders, money managers, bond issuers and the former head of the Municipal Securities Rulemaking Board have all commented on how intermediate buyers profit by marking up bonds and reselling, or “flipping” them to individuals.
Municipal bonds are not well-placed to final investors by this system, saidChristopher “Kit” Taylor, who for almost 30 years was executive director of the MSRB, the market’s self- regulatory organization.
“There is an unhealthy relationship between the bond funds and the dealer community,” said Taylor, now a consultant based in Alexandria, Virginia. “I have long suspected that dealers throw money at the funds by selling them new-issue securities in blocks and then slowly buying them back at up-prices for sale to retail.”
James C. Cusser, a former portfolio manager and municipal bond analyst for 30 years, who recently completed his masters degree in education at Harvard University, observed, “The biggest/best buyers take advantage of the nature of the illiquid muni market with the help of their best friends in the world.”
The same happens in the taxable bond market, Cusser, previously a fund manager at Waddell & Reed Inc., in Overland Park, Kansas, said. “But the price differences are slimmer and the potential profit is less certain.”
To contact the reporter on this story: Joe Mysak in New York atjmysakjr@bloomberg.net.
