Buying Municipal Bonds

Investors buy municipal bonds at issue or in the secondary market. Financial newspapers such as Barron?s, The Wall Street Journal, and the New York Times quote the forthcoming sales of new municipals weekly. The Bond Buyer, a municipal bond specialized publication provides additional background information.   

In some cases, local and state governments negotiate their issues directly, quoting them privately in the market , generally directly to institutional buyers.

The majority of new municipal bonds are allocated through investment bankers that offer them to the entire investing community (the public). Investment bankers form a syndicate of brokerage firms to sell new issues. If their brokerage firms are part of the syndicate they will not receive commissions for these buying.

Another advantage of buying an issue is that bonds are priced uniformly (at the syndicate offering price) until every syndicate?s order have been taken. Only then bonds are negotiated at market prices.

Buying municipal bonds in the secondary market can end up being troublesome, because of financial newspapers only quote prices of some of the most popular revenue bonds. The prices of government-obligation bonds are not quoted in the newspapers  To know which bonds are available in the secondary market you can ask for a copy of the blue list, daily published in Standard & Poor?s. In these you will find the bonds that dealers carry in their portfolios and wish to sell.

The list, generally includes the following information about the bonds:

  • Number of bonds in sale from each issue
  • Issuer?s name
  • The coupon rate and maturity date
  • Price (not including the bid and ask spread)
  • Name of the dealer selling the bonds

Because of subscription to the blue list, considered the best topic-related source of information, it is rather expensive for most individual investors. Ask your broker for a copy, but it is most probably that by the time it reaches you many bond issues will have already been sold.

Because the bid and ask spreads are not quoted there might be some deviation from those prices quoted in the blue list.

Some internet sites provide daily information about municipal bonds. The web site www.bondmarkets.com has many municipal links. Another site, www.investinginbonds.com lists the municipal bond prices, yields, and credit ratings of the bonds being negotiated. All-around USA municipal bond dealers support secondary markets. Brokers perform as mediators between dealers and individual and institutional investors in issuing municipal bonds. Many brokerage firms keep markets in two issues: local and regional.

Market prices of municipal bond issues may vary significantly from dealer to dealer, so that when buying or selling it you should compare market prices coming from different brokerage firms. Shop around because paying high commissions and wide spreads lowers the overall return.

Municipal bonds in the secondary market can be negotiated in a discount or premium depending on many factors such as quality, coupon yield, financial strength of the issuer, and maturity terms.

When you buy municipal bonds at discount or premium be careful with similarities with incurring capital gains when bonds are being sold or called. For example, if you bought 50 municipal bonds at $50,000 face value at a discount of $45,000 in 2005, and later you buy another 50 municipal bonds at $50,000 face value at a premium of $55,000 both issues maturing in 2005. $5,000 are subject to 2005 capital gains. (puzzled? Most people are).

According to the Internal Revenue Service (IRS) Tax Code (Section 171), tax-exempt bonds offer no allowable deduction for amortization of premium. In other words, you cannot offset your $5,000 gain against your $5,000 loss because the loss is not recognized (the loss cannot be deducted).

Beginner Money Investing Municipal Bonds The Risk of Municipal Bonds Buying Municipal Bonds Buying Tax Exempt Bonds