Despite Risks, Muni Bond Investors Are Twice as Likely to Buy Than Sell

by: Robert Kane

According to research from market data provider BondView, municipal bond investors are more than twice as likely to buy bonds rather than sell bonds, despite recent price declines and the fundamental risks overshadowing the muni bond marketplace.

So investors are demanding more bonds not less. The BondView Buy/Sell Index tracks about 1.2 million bond transactions from the prior 30 days and currently shows 2.5 purchases for every 1 sale as follows (click to enlarge):

BondView Buy /Sell IndexClick to enlarge

While this may seem inconsistent with the potential risks, retail investors now dominate the ownership of muni bonds versus institutional investors. Retail investors own nearly 70% of all muni bonds (directly and through funds) and account for 81% of trading volume, according to the SEC. Since retail bond investors tend to buy and hold till maturity, they are less focused on daily price fluctuations. However, retail investors are concerned about higher income tax rates and see muni bonds as the last great tax shelter.

According to Steve Mclaughlin, Executive Director of Municipal Market Advisors,

Any bubble theory is based upon the idea that assets get overvalued based on unrealistic demand. Thats not the case with munis which still yield a higher return than comparable investments, so demand remains strong for now.

Some reasons for the recent price decline relate to the instability of municipalities' finances, the potential expiration of the Build America bond program, and the effects of the Fed’s bond buying - which excludes the 30-year Treasury. A wide ranging price re-calibration occurred last week that caused all muni bond prices to be reset lower. Since muni bonds are priced on a spread to Treasuries, as yields on 30 year Treasuries moved up, so did yields on long-term munis. Yields go up, prices go down.

Disclosure: No positions