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.”