Muni Liquidity Down

by PL

Most municipal market investors and their advisors would agree that liquidity in the municipal bond market has declined in the last several years.

Using the amount of financial assets reported by broker/dealers as a proxy for their market-making activities and therefore the depth of markets, reveals the decline.

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Since the end of 2006, the estimated amount of broker/dealer assets devoted to supporting the municipal bond market has declined by over 70%.

The reduction of broker/dealer support of the municipal bond market is not surprising, as the trend reinforces the anecdotal observations about the changing nature of secondary market liquidity. (This chart is not intended to imply complete precision in the amount of capital deployed by the broker/dealer community to the markets, but rather to be indicative of the trend of their level of activity in the markets.)

The recent reduction of support of the market by broker/dealers has created a tangible reduction in the ability of investors to easily sell or buy on a consistent basis. While this does not mean that investors should reduce or avoid municipal bond investments solely for this reason, it does raise the importance of considering potential secondary market liquidity prior to making any investment decisions.

While liquidity may be down, investors continue to be active net buyers of municipal bonds–especially through mutual funds and ETFs. (Market flows will be examined in another post. Interested readers may wish to also look at this recent article on

Self-directed investors must be comfortable with the implications for their own portfolios, or consider if they would prefer delegating portfolio decisions to a professional manager.


This is not a recommendation to buy, sell or hold any securities or strategies. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. Past performance is interesting but is not a guarantee of future results. Investments in bonds, and fixed income funds or ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.