How to Buy Municipal Bonds and Get the Best Price Possible

If you want to know how to buy municipal bonds, you should start by getting to know the retail order period, as this is where you are likely to get the best price.  The majority of new municipal bond issues have a retail order period where non institutional customers have first pick of the new issue.  Bond issuers offer bonds through the retail order period first, as they want to make sure that individual investors get a fair shake in the new deals.


How to Buy Municipal Bonds Through the Retail Order Period

Unfortunately there is not currently one central place where all municipal bond retail order periods are listed.  However, many of the large online brokers have lists of the retail order periods that they are providing access to at any given time.  From our experience fidelity has the most extensive list by far.  To get to the retail order periods simply click the “municipal bonds new issues link in the bond section of fidelity.com.  You will need an account to get that that page.

If you prefer to go through a full service broker, then we recommend quizzing the broker first on what type of access they offer to retail order periods and how its gone about.

What are the advantages of buying municipal bonds through the retail order period?

1) Retail Buyers Get Preference Over Institutional Buyers

New municipal bond offerings are often oversubscribed, meaning there is more demand than inventory of the bonds. There may be $10,000,000 in municipal bonds for sale, and orders totaling $30,000,000. The question is who gets the bonds? Retail buyers, particularly from the state in which the bond is being issued, usually get a preference over institutional buyers.

2) Individuals buying municipal bonds Pay The Same Price As Institutional Buyers

Unlike stocks, everybody does not get the same price when buying and selling municipal bonds. The price difference between what retail and institutional buyers pay is so large that  “EMMA”, the official online system for municipal bond price reporting, lists institutional and retail trades separately under the following categories: “customer bought”,  “inter-dealer trade” and “customer sold”.

A recent report indicated that retail municipal bond buyers tend to pay about 2% more than institutional buyers for the same bonds when buying municipal bonds outside of the retail order period. However, when a retail investor participates in the retail order period, they pay exactly the same price as institutional investors.

3) The Credit Rating Of The Bond Will Be Current

Unfortunately, the major credit rating agencies don’t monitor the credit conditions of many municipalities very frequently after the initial rating. As a result, there is the chance for a credit change of several notches when the rating gets reviewed. When buying municipal bonds through the retail order period, you know the credit rating is fresh.


What are the disadvantages of buying municipal bonds through the retail order period?

Lack of Municipal Bond Inventory That Matches Your Needs

The launch of a new municipal bond issue is dependent on many factors, such as market conditions and political approval. The bonds that you want in terms of geography, maturity, tax status, and credit rating might not be available at the time that you want to buy them. Even if the type of bond you want is about to have a retail order period, your particular broker may not have access to it. A new bond issue is like an IPO, some brokers can provide clients access to the new issue and others cannot. Fidelity and Schwab both make it easy to sign up for alerts for when they have access to new issues.


What happens when you cannot find the municipal bonds you want to buy through the retail order period?

You buy the bonds in the secondary market. In general, we don’t recommend using a bond specialist or regional broker to buy municipal bonds. Generally speaking, these firms have a financial incentive to steer you to bonds that they currently own, instead of providing you access to a broad array of choices. Instead, we recommend that you work with one of the large online brokers.

You can open an account with Fidelity, Schwab or TD Ameritrade to buy municipal bonds. Generally, speaking these firms charge around $1 per bond in commission, with a $10 minimum and a $250 maximum commission.

There are many differences between buying municipal bonds and buying stocks, such as:

1) You can only buy fixed amounts of municipal bonds and there is limited inventory. Generally speaking, the minimum amount of municipal bonds you can buy is 5 bonds (around $5,000). In many cases there is only a limited amount of a particular bond for sale, for example 20 bonds.

2) With stocks, you can very easily place an order to buy at a different price if you don’t like the price that is being shown to you currently.  When you go to buy a municipal bond however, the quote you get from the bond dealer is basically “take it or leave it”, and you do not have the opportunity to place an order at a different rate.

Before starting we recommend any investor to find out all there is to know about fixed rate bonds. We also encourage users to read our guide on how to buy bonds to get an understanding of fees, platforms and possibilities available in order to make the best choice.

This lesson is part of our Free Guide to the Basics of Investing in Municipal Bonds. Continue to the next lesson here.



All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.

HTML Snippets Powered By : XYZScripts.com