MSRB Economists Examine Causes for Increase in Customer Trade Costs

MSRB researchers examined potential causes of recent increases in secondary market customer costs for fixed-rate municipal securities. The rise in these costs, as measured in effective spread, reversed a consistent downward trend for over a decade.

In a Report, the researchers, including MSRB's chief economist, found that rising inflation and interest rates were likely the cause for the increase in the effective spread since the beginning of 2022.

The researchers stated that the bond price decline might have elevated the effective spread due to discount bonds being less liquid than premium bonds under the IRS’s Market Discount Rule (a/k/a the de minimis tax rule). Further, the researchers noted that broker-dealers more frequently charge a fixed markup for each trade so that when bond prices decline, the effective spread increases.