Municipal Bond Trading Volume Tumbles to Lowest in a Decade

  • $551 billion traded in the third quarter is least since 2005
  • Tax-exempt yields plunged over the period as the Fed stood pat

Trading volume in the $3.7 trillion municipal-bond market fell to the lowest level in at least 10 years during the third quarter, which was a period of low and volatile yields as the Federal Reserve considered raising interest rates from near zero.

The total par value of traded munis was $551 billion in the three months ended Sept. 30, down 18 percent from $672 billion in the same period a year ago, according to data released late Thursday by the Municipal Securities Rulemaking Board. It’s the lowest since the data begin in 2005 and down from a peak of $1.86 trillion in the second quarter of 2007.

With interest rates still hovering near half-century lows, muni investors are loath to buy new debt as the Fed appears closer to raising borrowing costs for the first time in almost a decade, Matt Fabian, a partner at research firm Municipal Market Advisors, said last month. In 2012, when tax-exempt yields reached the lowest since 1965, transactions dried up to a 2005 low.

Benchmark 10-year munis yielded 2.37 percent to start the third quarter, data compiled by Bloomberg show. By Sept. 30, they dropped to a five-month low of 2.09 percent after the Fed decided not to raise interest rates.

The most-traded long-term debt by volume during the third quarter was Puerto Rico’s benchmark general obligations due in July 2035. Almost $2 billion of the bonds changed hands over 890 trades, the MSRB data show.

Though the volume of municipal securities that changed hands fell to a new low, the number of trades in the third quarter increased from the same period in 2014, to 2.33 million from 2.19 million, according to the MSRB.