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Muni-Bond Markups About Double Those on Corporate Debt, S&P Says

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March 12 (Bloomberg) -- Investors in the $3.7 trillion municipal-bond market pay markups to brokers that are about twice as high as those on corporate securities, according to Standard & Poor’s Dow Jones Indices.

People who bought $100,000 or less of investment-grade local debt in December paid brokers an average transaction cost of 1.73 percent, according to the S&P report released yesterday. By comparison, the average on above-junk corporate bonds was 0.87 percent.

Buying a muni bond entails “hidden transaction costs” for the debt, which usually isn’t sold with a commission, according to the report, which concluded that the markups reduce the investments’ value.

The over-the-counter municipal market is composed mostly of individual investors, who are more likely to hold securities to maturity than institutions. Such buyers own about 60 percent of the local-debt market directly or through mutual funds.

To reflect this, the study used trades of $100,000 or less, a size more typical of individuals.

“Using municipal bonds as an example, buying individual bonds may not always be the most efficient transaction,” according to the report. For exchange-traded funds and mutual funds, “there may be lower, or no, transaction costs.”

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum

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