| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Broker markups taking big bite out of muni bond payouts
With puny yields, charges can eat up to a year's worth of coupon income |
Peter Kuhn, an investor from San Jose, California, who owns more than $1 million in municipal bonds, scours pricing websites and uses Zions Bancorporation's online brokerage to avoid getting overcharged when he buys tax-exempt debt.
Consumers who aren't as savvy may be paying more than they have to for state and local obligations in the $2.8 trillion U.S. municipal market, where individuals and mutual funds hold about two-thirds of outstanding securities. Firms selling to customers mark up the price an average $5 to $10 per $1,000 bond, or 0.50 percent to 1 percent, said Thomas Doe, chief executive officer of Municipal Market Advisors, a Concord, Massachusetts-based research firm.
Because tax-free yields are at their lowest levels in four decades and dealers have flexibility on pricing, investors have to be more careful to make sure the markup they're being charged isn't excessive, said Mitchel Schlesinger, chief investment officer at FBB Capital Partners.
“Do more homework to make sure you're not getting ripped off,” said Schlesinger, who oversees $80 million in munis for the Bethesda, Maryland-based advisory firm. “You could easily give up a year of coupon income because yields are so low.”
Shrinking supplies of tax-free municipal debt and the lowest rates on U.S. Treasury 10-year notes in more than a year have driven down yields on 10-year and 30-year AAA general obligation bonds to the lowest levels since the 1960s, according to MMA's Doe. The 10-year tax-exempt rate was 2.60 percent as of Aug. 24 and the 30-year rate was 4.16 percent, according to MMA's indexes.
Broker Compensation
About 2,000 firms from Bank of America Corp.'s Merrill Lynch to New York-based Lebenthal & Co. buy and sell state and local securities to individuals, according to the Municipal Securities Rulemaking Board in Alexandria, Virginia. The obligations aren't traded on exchanges like stocks. Dealers typically are compensated in lieu of a commission by marking up a bond's price when selling to customers or marking down when buying, said Ernesto Lanza, general counsel for the MSRB, which sets rules for the industry.
That's legal as long as the markup or markdown is “fair and reasonable,” according to the MSRB. Brokers consider items including market value, transaction costs, trade size, credit quality and risk involved in owning the bond when deciding the total price charged to the customer, Lanza said.
Investors can use EMMA, the MSRB's Electronic Municipal Market Access website, to type in a bond's serial number, known as a Cusip, and see how a broker's offering lines up what other consumers paid. For example, on Aug. 9 a New York City general obligation bond maturing in 2019 traded four times in two hours, according EMMA. A dealer bought from another firm $35,000 in bonds priced at 110.79 cents on the dollar. The same-size lot was sold to an investor priced at 112.01 and yielding 1.85 percent.
Eating Income
That differential in price eats up almost a year's worth of income, said Schlesinger.
Another customer buying an $800,000 lot of the bond the same day received a price of 110.51 for a 2.22 percent yield, according to MSRB data.
“It pays to be a savvy investor,” said Bhu Srinivasan, publisher of the research website municipalbonds.com. “If you ask, or you have a relationship with a broker where they know you are an aggressive shopper, you may get a better price.”
Municipal bonds are generally exempt from federal taxes as well as state and local levies for residents in most states where they're issued. For highest earners paying a 35 percent federal rate on income, a 2.60 percent return on the securities is equivalent to a 4 percent taxable yield.
‘Best Value'
Kuhn, the California investor, looks up recent trades before buying because “you want the best value for your dollar,” he said.
The 49-year-old founder of an employee benefits consulting firm said he purchases munis on zionsdirect.com. The Salt Lake City-based online brokerage charges $10.95 per online trade and doesn't mark up securities over the price it paid, said Veronica Atkinson, vice president of bond trading for Zions Direct.
“Recent price information isn't always available to investors because the industry includes many small issuers whose bonds may not trade often,” said Guy LeBas, chief fixed-income strategist for Janney Montgomery Scott LLC in Philadelphia with $7.3 billion in tax-free bond assets.
For the complete article visit Investment News
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