Municipal bond trading modernizes
May 6, 2019

Nearly two-thirds of US asset managers and hedge funds traded municipal bonds electronically in 2018, up from roughly half only two years ago, according to a new Greenwich Report, contradicting the traditional stereotype of the municipal bond market as frozen in time.

"The municipal market's reputation as the last piece of the old Wall Street is about to change," says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology Group and author of The Modernization of Municipal Bond Trading.

In fact, some measures show that liquidity in the muni bond market has seen a notable improvement in the past year, which is in surprising contrast to the US treasury market, where liquidity has marginally declined. "While market structure is too complex to assume that e-trading is the sole driver of better liquidity, the improved transparency and market access it provides certainly has a starring role," says McPartland.

At the end of February 2019, the municipal bond market had 1,023,438 available bonds to trade; that's 30 times more than in the corporate bond market.  According to ICE (Intercontinental Exchange),  California – the largest municipal bond issuer with 15 percent of outstanding bonds by notional amount – has nearly US600 billion of total debt outstanding, which is more than all but the top five government bond issuers in the European Union.

And while there is no evidence that secondary market trading levels, which experienced a big drop following the financial crisis, will ever get back to where they were in 2007, the last two years have seen volume growth re-emerge. Greenwich Associates adds that its data suggest that volume growth will continue at least through 2019, and technology innovation will play a big role.

The next two years will see electronic trading and data quality increase, bolstering already strong natural demand from investors for municipal bonds. "Despite a lack of public attention, the muni market's technological evolution is keeping pace with the rest of the bond market, while taking into account its unique market structure," says McPartland.





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Nearly two-thirds of US asset managers and hedge funds traded municipal bonds electronically in 2018, up from roughly half only two years ago, according to a new Greenwich Report, contradicting the traditional stereotype of the municipal bond market as frozen in time.

"The municipal market's reputation as the last piece of the old Wall Street is about to change," says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology Group and author of The Modernization of Municipal Bond Trading.

In fact, some measures show that liquidity in the muni bond market has seen a notable improvement in the past year, which is in surprising contrast to the US treasury market, where liquidity has marginally declined. "While market structure is too complex to assume that e-trading is the sole driver of better liquidity, the improved transparency and market access it provides certainly has a starring role," says McPartland.

At the end of February 2019, the municipal bond market had 1,023,438 available bonds to trade; that's 30 times more than in the corporate bond market.  According to ICE (Intercontinental Exchange),  California – the largest municipal bond issuer with 15 percent of outstanding bonds by notional amount – has nearly US600 billion of total debt outstanding, which is more than all but the top five government bond issuers in the European Union.

And while there is no evidence that secondary market trading levels, which experienced a big drop following the financial crisis, will ever get back to where they were in 2007, the last two years have seen volume growth re-emerge. Greenwich Associates adds that its data suggest that volume growth will continue at least through 2019, and technology innovation will play a big role.

The next two years will see electronic trading and data quality increase, bolstering already strong natural demand from investors for municipal bonds. "Despite a lack of public attention, the muni market's technological evolution is keeping pace with the rest of the bond market, while taking into account its unique market structure," says McPartland.



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