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  • Attention Municipal Bond Investors: Your Comments Wanted On MSRB Notice 2013-16 [View instapost]
    First of all I would like to say that I do agree that some aspects of the Muni market may seem suspicious because of the lack of information available, but that doesn’t mean you are getting “Ripped off”
    My response to your first question would be easiest to answer hypothetically. Say you want to sell your 5 PR bonds if you can get a certain price, but if not you'd like to hang on to them for the time being. You call up your broker and say "if you can get me $78 for these bonds, I will sell them." The $83 or $98 offerings that you see on your screen may actually be customer sell orders that brokers have “In Hand” from a client trying to get those prices. It doesn’t necessarily mean that the bonds were already bought from the customer at a lower price, and then offered there. Does that make sense? If you called your broker and said, “if you pay me $97 for these 70 bonds, they are yours” your broker could go on the platform and offer 70 bonds at a $98 (1 Point higher to make room to be bid back, and for commission) before he ever bought them from you. So, the bonds you see offered to you at $83 and $98 could very well be customer sell orders at $82 and $97.
    As for your second question,
    Let’s say that you have a Harley Motorcycle, and this morning you read in the news that Harley's have been having engine troubles that may cause the bike to catch on fire (and lose 100% of its value)
    If you went to a motorcycle dealership with your used Harley, and wanted to sell it that day, would you expect to get top dollar for it? Especially if Harley's engine troubles were plastered all over the news? I think it is more realistic to expect to get a lower than value price because the dealership is taking a risk that they may not be able to make a profit on that Harley because of all the uncertainty surrounding the name. If a salesman does actually convince a customer to buy it and it goes up in flames, that has a negative impact on his and the dealer’s reputation and could cost them future business in the same way that a broker can lose an account by selling them a bond that defaults. This example does not incorporate the interest rate risk that the dealer also takes on. (The day of your screen shots happened to be a recent high for interest rates as you know)
    Exactly how much money is appropriate to account for liquidity is not black and white. In times of large interest rate swings and defaults… more so than usual. Obvious factors of liquidity are Issuer, maturity, coupon, rating, and block size as I am sure you know. When it comes to how tight certain cusips trade, it is a factor of what type of bond it is, and if large blocks are trading or if small odd lots are making up the majority of volume. An insured or essential service bond is going to trade more tightly than a troubled housing bond.
    Buying odd lots can get you a better deal sometimes, but I would mostly consider them for your “buy and hold” clients. Getting a bid on an odd lot will usually be less than a round lot (because of liquidity) If you are going to be actively managing Muni bonds, round lots are probably your best bet.
    The issue I had with your post is that you chose a block of 5 Puerto Rico bonds to make your argument… An uninformed retail investor may finish reading your article with an attitude that bond dealers are ripping them off, which is not the case in my opinion.

    It seems as though Muni investors are not taking the time to educate themselves on how the market works, and then are complaining when things don’t go their way.
    Sep 18, 2013. 02:08 PM | Likes Like |Link to Comment
  • Attention Municipal Bond Investors: Your Comments Wanted On MSRB Notice 2013-16 [View instapost]
    Interesting, but how can you say that the 5 bonds that were offered that same day were in fact the same ones bought from that customer? With that maturity having 11.5MM bonds outstanding, its safe to say those may not be the same bonds being offered. Making your arguement with a Puerto Rico bond is flawed, PR bonds are illiquid and currently carry much higher than average risk, thus the purchaser of the bonds (The Broker/Dealer) should be compensated for taking on that risk. 5 bonds were bought on 9/5 @ $70.558 then traded to another dealer @ $71.258. (The same day the 10y treasury hit its recent high making that bond worth less) Assuming (like you have) that the same block of bonds was then offered, they werent even traded to another dealer until 9/12 (Seven days later) @ $74.502 and then sold to a Customer @ $75.433. We are talking about less than $250 total split between all the dealers to provide liquidity to a customer and as sales commission for providing the bonds to the end account.

    I bet the original selling customer would gladly pay $250 again instead of having to find someone to buy that POS all by themselves! If you want to make an arguement like this, you need to show actual trades.
    Sep 16, 2013. 08:37 PM | Likes Like |Link to Comment