Individual investors pay more than institutional investors to access the recently issued market, a Municipal Securities Rulemaking Board research report found.
That follows its 2023 report on a similar topic, which found from 2018 to 2022 that individual investors not investing through separately managed accounts had minimal participation in the primary market and were more reliant on the secondary market than institutional investors. This report released Monday compares customer purchases in the primary market with customer purchases made during the first seven days of secondary market trading, or what they term the “recently issued” market.
“Individual investors often obtain a large portion of their bonds in the recently issued market and at higher prices than institutional investors, which dominate the primary market,” the MSRB said. “Furthermore, individual investors bought a much higher percentage of their bonds in the recently issued market compared to institutional investors and paid higher spreads on their purchases. Smaller size trades had an average spread of just over $10.00 compared to less than $5.00 for larger-size trades.”
The MSRB found that between 2019 and 2023, 53% of the par amount purchased by individual investors happened in the primary market compared to 47% in the recently issued market. That’s compared with institutional investors, who acquire 92% of their bonds in the primary market and 8% in the recently issued market.
During the same period, “individual investors paid an average of just over $10 per bond above the list offering price on trades in the recently issued market, which is about twice as much as what institutional investors paid,” the MSRB said. “If individual investors accessed the primary market more often, they likely would receive more favorable pricing than in the recently issued market.”
The report also looked at sales in the competitive market, unique for munis, compared to the negotiated market and found that 27% of the par amount issued in the last five years was issued through the competitive market and only 11% of the par amount purchased by customers in the primary market was issued through the competitive market, compared with 89% in the negotiated market.
“This imbalance of primary market purchases and the amount of new issuance brought in the competitive arena seems to indicate a need for underwriters to sell substantially more of their competitive offerings in the secondary market relative to negotiated offerings,” the MSRB said. “This implies that underwriters may have more risk from remaining balances on competitive deals taking longer to place in the market and could help partially explain the much smaller spreads in the competitive market.”
Negotiated deals accounted for almost 73% of the total par amount issued but those can be sector specific, as education and general purpose deals don’t use the negotiated market as frequently as others such as healthcare and housing.
The tax status of a particular deal also can play a significant role in how it’s brought to market, as taxable offerings and those subject to the Alternative Minimum Tax are often considered more complex and aren’t typically brought to the competitive market. According to the board, 14% of taxable deals and 2% of AMT deals come through the competitive market, compared with 29% of tax-exempt volume.