Nearly two-thirds of U.S. asset managers and hedge funds traded municipal bonds electronically in 2018, up from roughly half only two years ago.
These findings from a new Greenwich Report contradict the traditional stereotype of the municipal bond market as frozen in time.
The municipal markets 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 new report, 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 U.S. 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 Kevin McPartland.
At the end of February 2019, the municipal bond market had 1,023,438 available bonds to trade; thats 30 times more than in the corporate bond market. According to ICE, California – the largest municipal bond issuer with 15% of outstanding bonds by notional amount – has debt outstanding, totaling nearly $600 billion. Thats 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 reemerge. Greenwich Associates 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 markets technological evolution is keeping pace with the rest of the bond market, while taking into account its unique market structure, says Kevin McPartland.