In This Issue

 1 Market Recap

2 Trading Volume

3 Yields & Spreads

4 U.S. Treasury Curve

5 Appendix A: Yield Matrix

6 Appendix B: Sector Analysis

7 Appendix C: Most Active States: Buys

8 Appendix D: Highest Buy/Sell Ratios by State

September, 2011

Market Recap

The following points summarize the developments in the retail market for municipal bonds last month.

• September was another extremely quiet month in the retail market for individual municipal bonds.
• The average number of “investor buy” trades per day was just 13,667 in September, which is only the second time buying activity has fallen below 14,000 TPD since we began tracking the metric in January, 2009.
• Selling activity was also low in September, but it was not as extreme by historical standards. There were 5,641 “investor sell” trades per day in September, which is less than last month but still within the normal range.
• Mutual funds were equally slow in September, receiving just $1.6B in net inflows (according to Investment  Company Institute).
• As always, in spite of reduced volumes retail investors remained strong net buyers. The September buy/sell ratio was 2.4, which is slightly increased from August’s 2.3 figure.
• Median municipal spreads increased in September, continuing a trend that began last month.
• Median municipal yields, on the other hand, decreased slightly in September because Treasury yields fell faster than muni spreads widened.
• Comparably rated revenue bonds were generally yielding more than their general obligation counterparts, continuing a trend that began in August.
• As usual, the wealthiest states were the most actively traded issues in September. By itself California accounted for nearly 16% of all purchases nationwide.

 

 

About the Market Transparency Report

The data and analysis contained in this monthly report are intended to provide transparency into the dynamics of the municipal bond market for retail investors. The report describes the important trends in the market, including trading volumes, most active issuers, yield/spread movements, and buy/sell ratios.

Retail trades are typically defined as odd-lot transactions under 100 bonds (i.e., less than $100,000 par value). The retail market is much smaller than the institutional market on a par value basis, but it accounts for roughly 75% of the trades that occur in the marketplace.

Author:

Chris Shayne, CFA

 

Data & Analytics:

Farshad Mashayekhi, PhD

Alison Li, PhD

 

About BondDesk Group LLC

BondDesk Group LLC is the nation’s largest retail bond trading venue, providing enterprise-wide fixed income solutions to many of the top broker-dealers in North America.

The BondDesk Alternative Trading System (ATS), run by BondDesk Trading LLC, connects broker-dealers through a centralized marketplace by offering a diverse pool of liquidity for odd-lot fixed income securities in multiple asset classes.

 

Market Transparency Report

Retail Trades of Municipal Bonds

 

Trading Volume

As you can see from the left-hand chart below, buying activity was choppy during September. The range was mostly between 12,000 and 16,000 trades per day, and the clear pattern of peaks & troughs reflects a lack of sustained demand among retail investors. This is mostly due to the low yield environment, which we’ll discuss in more detail in the next section.

The right-hand bar chart shows the average daily retail trades by month since January, 2009. You can see that the volumes in September were the lowest of any month in that period (13,667 TPD). In fact, September and August are the only two months since 2009 with buying volume below 14,000 TPD.

 

Daily Buy Trades, September, 2011                                                                       

 

Monthly Average Buys Per Day since Jan, 2009

Source: MSRB

As you can see from the left-hand chart below, investor selling activity was also choppy in September. The general trend was upward, which makes sense. When yields are low prices are high, and this gives sellers a chance to lock in gains. Another possible explanation for the increased selling activity is that retail investors were nervous about municipal credit risk given the recent economic uncertainty, and they sold in order to reduce their exposure.

The right-hand bar chart shows the average daily sell trades per month since January, 2000. You can see that the September selling volume was lighter than the August volume, but it is still well within the normal range.

 

Daily Sell Trades, September, 2011                                                                         

 

Monthly Average Sells Per Day since Jan, 2009

Source: MSRB

Yields and Spreads

As you can see from the left-hand graph, median municipal yields fell roughly 15 bps from the beginning of September to the end, which is the 2nd month in a row that they’ve fallen. As we’ll discuss in the next section, yields have been decreasing across the investment grade rating spectrum. This is most likely the reason that retail demand was so weak in September – investors are not motivated by the low returns in the municipal market.

You can see from the right-hand graph that September yields were slightly lower than August yields, continuing a downward trend that started when they peaked earlier this year (following the infamous remarks by Meredith Whitney).

 

Median Yields, September, 2011                                                                                       

Median Yields, past 12 months

Source: MSRB

As you can see from the left-hand chart, municipal credit spreads increased nearly 30 bps in September. The right-hand chart shows that this is the third month in a row that spreads have steadily increased.

Muni yields are falling in spite of rising spreads because Treasury yields contine to edge downward faster than muni spreads are widening.

  

Daily Median Spreads, September, 2011                                                                  

 

Daily Median Spreads, past 12 months

Source: MSRB

In September, spreads for investment-grade revenue bonds were consistently higher than their general obligation counterparts. This continued a trend that started last month.

 

  

Tax-Exempt Median Spread, Rev. vs. GO, September, 2011           

Taxable Municipal Median Spread, Rev. vs. GO, September, 2011      

Source: MSRB

 

 

 

  

U.S. Treasury Curve

Of course the big news about the Treasury curve in September was Operation Twist, announced on 9/21. The program is different than the previous Fed interventions (Quantitative Easing I & II) because it does not call for printing new money to buy Treasury bonds.  Rather, the Fed intends to sell $400B worth of existing positions – specifically medium-term Treasuries – to raise capital to buy long-term Treasuries.  The idea is to flatten the curve by simultaneously raising medium-term yields and lowering long-term yields.

Flooding the market with medium-term Treasuries drops the market value by increasing the supply, thus increasing yields. Conversely, buying hundreds of billions of long-term Treasuries has the opposite effect.

Surprisingly, Treasury yields increased in the first few days after the program was announced, but the trend didn’t persist. Treasury yields are still near historic lows.

The left-hand chart shows 10-year yields for the past month only. The right-hand chart shows the one year history of closing 10-year yields.

 

 

Source: BondDesk Group LLC

Appendix A: Yield Matrix

In this section we display the median yields for municipal bonds in each major agency rating grade and maturity bucket.  We have created four different matrices – G.O. tax-exempt, revenue tax-exempt, G.O. taxable, and revenue taxable – because each sector has its own yield behavior. (Note that we post daily yield matrices on www.bonddeskgroup.com.)

Tax-Exempt
			% of Trades		Median Yield, %														Median Spread, %
					2Y		5Y		10Y		15Y		20Y		25Y		30Y
General Obligation	AAA		4.1		0.6		1.2		2.3		3.1		3.6		3.7		3.9		0.4
	AA		19.2		0.7		1.4		2.6		3.4		3.9		4.1		4.4		0.7
	A		4.4		1.0		1.7		3.0		4.0		4.3		4.5		4.5		1.1
	BBB		1.1		1.6		3.0		4.3		4.8		5.1		5.1		5.3		2.0
	HY		0.0		1.2		6.3		6.7		5.7		5.9		5.8		8.0		4.6
	NR		1.2		0.8		1.8		2.9		4.3		4.4		5.0		5.3		1.2
Revenue	AAA		3.1		0.4		1.4		2.4		3.2		3.6		3.8		3.7		0.5
	AA		34.4		0.7		1.7		2.9		3.8		4.0		4.3		4.5		1.0
	A		18.0		1.1		2.2		3.5		4.2		4.6		5.0		4.9		1.6
	BBB		8.4		1.9		3.3		4.7		5.1		5.3		5.4		5.4		2.3
	HY		0.6		5.5		5.7		6.2		5.9		6.0		6.2		8.1		3.7
	NR		5.4		1.0		3.1		4.0		5.2		5.4		6.0		6.6		2.6
% of Trades				9		15		16		19		18		14		9		-

 

Taxable
		% of Trades	Median Yield, %							Median Spread, %
			2Y	5Y	10Y	15Y	20Y	25Y	30Y
General Obligation	AAA	2.2	0.8	2.2	3.1	3.8	4.4	4.6	4.7	1.2
	AA	19.2	1.2	2.8	4.1	4.5	5.1	5.3	5.5	2.1
	A	9.0	1.6	3.5	4.8	5.5	5.7	6.1	5.8	2.7
	BBB	1.0	4.0	5.3	5.7	5.3	5.8	6.3	6.5	3.8
	HY	0.1	6.5	-	8.6	8.4	-	-	9.9	6.5
	NR	2.6	1.5	3.1	6.2	5.0	5.2	-	-	4.4
Revenue	AAA	1.2	1.2	2.4	3.3	4.0	4.4	5.0	4.8	1.4
	AA	27.6	1.2	3.2	5.1	4.7	5.0	5.2	5.4	2.1
	A	27.3	2.0	4.0	5.9	5.6	5.8	6.3	6.0	3.5
	BBB	8.1	2.8	4.3	6.0	6.7	6.7	6.6	7.2	3.9
	HY	0.2	7.3	0.7	7.2	7.9	-	10.0	10.0	6.9
	NR	1.5	2.3	6.7	6.5	6.4	13.0	7.7	7.5	5.2
% of Trades			3	12	25	19	14	13	15	-

Source: BondDesk Group LLC & MSRB

About the BondDesk Yield Matrix

You can use these yield matrices to benchmark your own investment opportunities. Bonds that conform to the yields in this table are trading in line with prevailing market opinion. But bonds with a substantially different yield may be subject to differences in credit, liquidity, or other pricing characteristics.  You need to research each individual bond to form your own opinion.

The expected behavior of this matrix is that yields increase as you descend each column (because credit risk is increasing) and also as you move left-to-right (because interest rate risk is increasing). Investors generally demand more compensation for greater credit risk and longer holding periods.

Appendix B: Sector Analysis

The pie chart below shows the share of investor buy trades in June for each of the four sectors defined above. As usual, tax-exempt revenue bonds dominate the trading activity, followed by tax-exempt GOs.

 

 

Source: MSRB

Appendix C: Most Actively Traded States: Investor Buys

The following table shows the states with the most actively purchased tax-exempt G.O. and revenue bonds last month. (NOTE: The data in this table is ranked by total number of tax-exempt municipal investor buy trades in that state.)

Tax-Exempt
	General Obligation
			Num of Trades	% of Trades	Median Yield, %							Median Spread, %
		Rating			2Y	5Y	10Y	15Y	20Y	25Y	30Y
1	CA	AA	14,375	18.0	0.7	1.6	3.0	4.1	4.3	4.5	4.8	1.1
2	NY	AA	7,447	9.3	0.7	1.4	2.5	3.2	3.6	3.9	4.1	0.6
3	FL	AA	1,675	2.1	0.9	1.6	3.9	3.4	3.8	4.1	4.5	1.1
4	TX	AA	9,253	11.6	0.7	1.5	2.6	3.3	3.7	3.8	4.0	0.6
5	PA	AA	5,255	6.6	0.8	1.6	2.7	3.6	4.0	4.1	4.2	0.8
6	IL	AA	5,586	7.0	1.0	2.2	3.5	4.2	4.5	4.2	4.0	1.3
7	NJ	AA	3,499	4.4	0.7	1.4	2.6	3.2	3.6	4.1	3.8	0.6
8	OH	AA	3,061	3.8	0.8	1.5	2.8	3.4	3.9	4.1	4.2	0.8
9	MI	AA	3,476	4.4	0.9	1.8	3.1	4.0	4.3	4.2	4.6	1.1
10	PR	A	1,729	2.2	1.6	3.0	4.3	4.6	5.1	5.1	5.3	2.0
11	MA	AA	2,335	2.9	0.6	1.2	2.5	3.1	3.7	3.9	4.1	0.5
12	IN	AA	297	0.4	1.0	1.9	3.1	3.6	4.0	4.3	-	1.0
13	AL	AA	909	1.1	0.8	1.6	2.8	3.6	4.1	4.4	4.7	1.1
14	GA	AA	680	0.9	0.6	1.2	2.0	3.1	4.0	3.8	-	0.2
15	VA	AA	1,060	1.3	0.5	1.0	2.1	3.1	3.6	4.0	3.8	0.3
16	NC	AA	752	0.9	0.5	1.2	2.1	3.1	3.6	-	-	0.3
17	CO	AA	943	1.2	0.7	1.3	2.4	3.2	4.0	5.6	5.0	0.5
18	MO	AA	656	0.8	0.6	1.4	2.3	3.7	3.7	4.9	-	0.8
19	AZ	AA	835	1.0	0.8	1.4	2.6	3.3	3.8	4.5	-	0.7
20	WA	AA	1,792	2.2	0.7	1.4	2.4	3.1	3.8	3.9	6.9	0.5

 

	Revenue
			Num of Trades	% of Trades	Median Yield, %							Median Spread, %
		Rating			2Y	5Y	10Y	15Y	20Y	25Y	30Y
1	CA	AA	26,590	14.3	0.4	2.1	3.4	4.3	4.9	5.0	5.1	1.7
2	NY	AA	16,551	8.9	0.7	1.7	2.7	3.5	3.9	4.2	4.7	0.9
3	FL	AA	18,047	9.7	1.0	2.2	3.3	4.4	4.3	4.9	4.9	1.3
4	TX	AA	9,564	5.1	0.8	1.7	2.8	3.8	4.0	4.1	5.1	1.0
5	PA	A	7,591	4.1	1.1	2.1	3.3	4.1	4.5	4.7	4.5	1.4
6	IL	AA	6,073	3.3	1.3	2.5	3.6	4.3	4.9	4.9	4.8	1.7
7	NJ	AA	7,111	3.8	0.8	2.1	3.2	4.6	4.2	4.5	4.6	1.3
8	OH	AA	4,397	2.4	1.0	2.0	3.1	4.0	4.4	4.6	4.8	1.3
9	MI	AA	3,948	2.1	1.0	2.1	3.9	4.3	4.8	5.0	5.5	1.8
10	PR	A	5,368	2.9	1.2	2.9	4.2	4.7	5.0	5.0	5.2	2.0
11	MA	AA	3,983	2.1	0.6	1.6	3.1	3.9	4.3	5.1	4.7	1.2
12	IN	AA	5,295	2.9	0.8	1.9	3.3	3.8	4.7	5.0	4.6	1.4
13	AL	AA	4,627	2.5	1.0	4.7	3.3	3.9	4.3	4.4	4.5	1.2
14	GA	AA	4,732	2.5	0.8	2.0	3.2	4.0	4.2	4.5	4.5	1.2
15	VA	AA	4,268	2.3	0.7	1.6	3.3	3.5	4.0	4.6	4.4	1.0
16	NC	AA	4,426	2.4	0.8	1.7	2.9	4.3	4.1	4.2	4.8	1.1
17	CO	AA	3,915	2.1	0.8	1.9	3.2	3.8	4.4	4.9	4.6	1.3
18	MO	AA	4,004	2.2	1.0	2.1	3.2	4.3	4.0	4.6	5.0	1.3
19	AZ	AA	3,766	2.0	0.8	1.9	3.0	4.0	4.2	4.7	5.9	1.2
20	WA	AA	2,742	1.5	0.8	1.7	2.7	3.6	4.0	4.1	4.5	0.9

 Source:  BondDesk Group LLC & MSRB 

Appendix D: Highest Buy/Sell Ratios by State

The table below shows the buy/sell ratios for the top 20 most actively traded states. The higher the ratio, the more investors purchased these bonds and the less they sold. This is a useful statistic because it gives you a sense of momentum in the market.

(NOTE: The data in this table is ranked by total number of municipal transactions in that state - including buys, sells, taxable, and tax-exempt. That’s why CA is ranked #1 even though its buy/sell ratio is lower than NY’s.)

September 2011
	State	Number of Buys	% of Buys	Number of Sells	% of Sells	Share of Buys vs. Share of Sells	Buys vs. Sells
		286,540	100.0	118,356	100.0	1.0	2.4
1	CA	47,459	16.6	18,827	15.9	1.0	2.5
2	NY	25,186	8.8	11,466	9.7	0.9	2.2
3	FL	20,410	7.1	8,377	7.1	1.0	2.4
4	TX	19,475	6.8	8,548	7.2	0.9	2.3
5	PA	13,847	4.8	5,367	4.5	1.1	2.6
6	IL	13,945	4.9	5,043	4.3	1.1	2.8
7	NJ	11,744	4.1	5,488	4.6	0.9	2.1
8	MI	8,508	3.0	3,557	3.0	1.0	2.4
9	OH	8,093	2.8	3,734	3.2	0.9	2.2
10	PR	7,605	2.7	3,305	2.8	1.0	2.3
11	MA	6,441	2.2	2,604	2.2	1.0	2.5
12	GA	5,751	2.0	2,476	2.1	1.0	2.3
13	VA	5,476	1.9	2,510	2.1	0.9	2.2
14	IN	5,696	2.0	1,726	1.5	1.4	3.3
15	NC	5,294	1.8	2,111	1.8	1.0	2.5
16	AZ	4,868	1.7	2,421	2.0	0.8	2.0
17	CO	5,185	1.8	2,082	1.8	1.0	2.5
18	WA	4,722	1.6	2,528	2.1	0.8	1.9
19	AL	5,794	2.0	1,277	1.1	1.9	4.5
20	MO	5,007	1.7	1,899	1.6	1.1	2.6

Source: MSRB

 

 

 

Disclosures

 

This report represents certain customer trades in municipal securities that have been reported by dealers to the Municipal Securities Rulemaking Board ("MSRB").  The report does not necessarily reflect all transactions that were effected on dates noted.  There is the possibility of errors or delays in the trade submission process.  Prices for transactions vary with market conditions and can be affected by trade size and other factors.  The information provided has been obtained from sources deemed to be reliable, however BondDesk Group LLC does not guarantee the accuracy of the information contained in this report. 

Fixed income securities are subject to increased loss of principal during periods of rising interest rates.  Fixed-income investments are subject to various risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.  Defaults on interest payments and/or principal may also occur.  Projections, results and assumptions contained herein reflect past performance of the referenced securities and asset classes.  Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate such that an investment, if and when redeemed, may be worth more or less than its original cost. 

This information is intended for general informational purposes only, and should not be used as the sole basis for any investment decisions.  None of the information in the report constitutes an offer or solicitation to buy or sell any security or financial product, a recommendation concerning any security, financial product or asset class, or an offer to provide investment advice or any other service.  Where advice is appropriate, please consult with a qualified financial or tax professional. 

BondDesk Trading LLC, member FINRA and SIPC, is a wholly-owned subsidiary of BondDesk Group LLC. 

 

 

(c) Bond Desk Group

www.bonddesk.com