If you’ve been reading along in our Beginner’s Guide to Muni Bonds, by now you should have an understanding of how muni bonds work. Perhaps you’ve even started thinking about adding munis to your investment portfolio. We’ve talked about scenarios in which muni bonds might make sense and reviewed the benefits and drawbacks of investing. We even explored the history of munis and how they came to be such an integral part of the market as we know it today. But all of this leaves us with one major question: Where are muni bonds going? What does the future have in store?
A Flawed, But Changing, System
In its current state, the muni bond market can be very limiting for those looking to break in and invest. While established investors and fund managers may have an easier time procuring muni bonds for their respective portfolios, newer and younger investors may have a more difficult time snagging the same opportunities. The supply of attractive muni bonds is more limited than that of corporate bonds, but an even bigger issue is the fact that most municipal bonds come with investment minimums of $5,000 or more. For those who are just starting out in the workforce or have limited capital to invest, those minimums can be an automatic deal-breaker. Additionally, muni bonds are often sold at a premium, making them even more expensive and narrowing the window for profit. Case in point: between 2009 and 2013, individual investors traded approximately $915 billion in municipal bonds and paid brokers an average spread of 1.73%, approximately double the spread on corporate bond trades during that same period. Neighborly, however, is looking to change this by giving investors direct access to municipal bonds and eliminating the middlemen.“This is an exciting time to be part of a community of investors,” says Jase Wilson, CEO of Neighborly. “Public projects are going to get funded and completed with less hassle and fewer delays. Neighborhoods are going to improve without the bureaucratic backlogs that once held them back. The public is going to have a voice and play a real role in shaping strong, vibrant communities.”
What Munis Need: More Transparency
The need for more transparency in the municipal bond arena is increasingly being addressed. EMMA, the Electronic Municipal Market Access website, offers a wealth of information on municipal bond pricing, and the site recently added a price disclosure tool, which allows investors to compare trade prices of municipal bonds with similar features. The Municipal Securities Rulemaking Board has also proposed new rules that would require brokers to disclose their pricing on muni bonds, thus helping investors avoid steep markups and fees that could eat away at, and in some cases negate, their profits. These regulations, from which investors stand to benefit, were recently endorsed by SEC Commissioner Luis A. Aguilar. New technology and online platforms such as Neighborly are also working to enable investors to access municipal bonds more easily. Neighborly is building tools that will allow investors to search for deals based on their preferences, for example, by location, affinity, or even budget.
Those looking to take part in the muni market will do so without having to worry about the hefty fees that tend to go hand-in-hand with classic broker transactions. Neighborly is also exploring ways to lower the minimum investment requirements on the bonds it will offer so that those with limited funds can still participate in community funding. Another great feature is Neighborly’s deal notification system, where users can sign up and receive alerts when offers become available that match their specifications.
One of the trickiest aspects of muni bond investing is that bond issues are often only available in limited supply and for a limited time. Investors can all too easily miss out on appealing opportunities due to something as simple as missing a single phone call from a broker. Neighborly’s platform is working to change this and open more doors for those eager to purchase munis.
For the People, By the People
Many of the projects funded by muni bonds are designed to improve communities and infrastructure. It seems counterintuitive to make investment opportunities with significant local impact exclusive and hard to come by. In recent years, there’s been a shift where cities and governments are not just accepting, but embracing the fact that major improvements and undertakings are often reliant on public support, and as such, there needs to be a better way to help individuals get involved.
“Investors are going to want to feel good about where their money is going,” says Neighborly CEO, Jase Wilson. “If you’re going to put your money somewhere, why not invest in a project that means something to you?” One such example was Denver’s recent issuance of mini bonds, which enabled Colorado residents to purchase bonds directly in $500 increments. The bonds were used to support the Better Denver project, an initiative geared toward building roads, parks, and facilities that would improve residents’ quality of life. Those who purchased the bonds were directly supporting the project while also earning returns on their investments.
The success of the Denver bonds supports the democratization of the municipal bond market. We are hopeful this will continue and issuers will see the benefits of raising money directly from locals who are, in turn, invested not only in making a profit, but in seeing the projects come to fruition. Along these lines, as the economy improves and younger, civic-minded investors are able to participate in such opportunities, they’re going to want easy, hassle-free access to specific projects geared toward improving their local communities.
It’s hard to predict what the future will hold for municipal bonds as far as prices and returns are concerned, but here’s what we’re likely to see: As investors are growing increasingly community-oriented and the powers-that-be on the government side are taking steps to address the problems that have impacted the muni bond market, we’re likely to see some significant changes in the way individuals are offered opportunities to invest. “Once a market for, of and by people, the municipal bond market has been optimized for global banks and institutional buyers. Technology will re-optimize it for people. People are hooked on the ability to quickly, conveniently support the companies and creative projects they love. Why not invest in their own neighborhoods?”