New York, May 21 (Bloomberg) -- Some day soon, getting a
price on a municipal bond may be just as easy as getting a price
on a stock.
At least that's the plan of the Municipal Securities
Rulemaking Board, the self-regulatory organization that oversees
the municipal bond market. The MSRB, which provides information on
bond trades the day after they occur, wants to move to real-time
price dissemination by the middle of next year.
Won't that be a good thing if you want to buy a bond? You
will be able to find out how it has been trading and evaluate its
price.
Not so fast, says the Bond Market Association, which
represents municipal bond dealers and has ``concerns'' about
publishing all bond prices. Earlier this month it spelled them out
in a five-page letter to the Securities and Exchange Commission,
which has enforcement responsibility for the MSRB.
The Bond Market Association is worried about the ``possible
impact of price dissemination on the liquidity of the market for
some inactively traded bonds,'' according to the letter.
``For inactively traded bonds, the publication of price
information, particularly in block size, may provide information
to other market participants that would affect the ability of a
holder of the same bonds to sell them without incurring a loss,''
the letter says.
If Everyone Knows
What does that mean? Let's take the example of bonds issued
by an airport authority and backed by an airline. These are
municipal bonds, yet they are repaid by the airline, not from any
taxes levied by a municipality.
Let's say the bonds are downgraded, as so many of the airline-
backed bonds have been since the Sept. 11 terrorist attacks put a
dent in air travel. Now let's say a municipal bond fund wants to
sell a block of them.
If everyone knows the bonds have been downgraded, the price
will go down. If everyone knows that a big holder of those bonds
is selling them -- big holders of bonds don't often just come in
and get rid of $4 million or $5 million of bonds in one shot, most
would sell them over the course of a few days -- the price will go
down even further. The more the merrier isn't the rule when it
comes to markets.
Prices Decline
``Institutional investors holding complex, `story,' or high
yield bonds also may be legitimately concerned that quick
dissemination will impact the price at which they are able to
dispose of particular bonds, perhaps in circumstances in which
legal requirements compel them to dispose of bonds that have
fallen in credit quality,'' according to the Bond Market
Association's letter.
What does this mean? Some bond funds can only put their money
into investment-grade bonds. Using the example of airline-backed
bonds, if the bonds have been rated below investment grade, the
fund holding those bonds would have to sell them -- or ``dispose''
of them, as the BMA so delicately puts it.
And what would happen then? Well, if everyone knows that the
fund is getting rid of its bonds, those prices would go way, way
down, and the institutional investor would lose money, unless he
sold all his holdings in one day.
To which most investors would say, well, yes, isn't that the
way markets are supposed to work?
`Liquidity' Defined
The Bond Market Association says it isn't against price
transparency. Oh, no. It just wants ``a more deliberate study of
potential liquidity effects.''
Ah, the L-word. In this case, let us define ``liquidity'' as
dealers standing ready to make a market in securities.
The BMA explains: ``The relationship between price
dissemination and liquidity exists because, particularly in the
case of infrequently traded bonds, the willingness of dealers to
trade with counter parties depends on the analysis by each dealer
of how much risk it is likely to assume in connection with a
particular trade, coupled with its ability effectively to manage
that risk, either by entering into an offsetting trade with
another party or entering into hedging transactions.''
Real-time price dissemination will make it harder for dealers
to set up those offsetting trades and hedging transactions, says
the BMA. And you know what that means.
``Adverse effects on liquidity could be particularly harmful
for retail investors, who rely on the dealer community to provide
liquidity on an ongoing basis,'' the BMA letter says.
Mom and Pop
So, the dealers say, it's really all about the beleaguered
individual investor. If you break up the clubby nature of the
municipal market, and if you prevent us from helping those big
investors work out of bond holdings that have become, shall we
say, uncomfortable, then we're all going to go out of business.
It's all about Mom and Pop.
Of course it is.
Am I the only one to get suspicious when the Bond Market
Association says the status quo benefits the individual investor?
