Tags: Zweig | mark-ups | muni | bonds

WSJ's Zweig: Muni Mark-ups 'Can Be Monstrous'

By    |   Monday, 10 June 2013 11:45 AM

With municipal bond yields near 15-month highs, you may be tempted to buy. But be careful of price mark-ups, says Wall Street Journal columnist Jason Zweig.

The yield on 10-year munis stands at about 2.2 percent, its highest since March 2012. Yields have soared 0.45 percentage point since May 1.

"We're approaching the levels where retail investors will start to raise their hands again. The pent-up retail demand is very strong," George Friedlander, chief municipal strategist at Citigroup, told Zweig.

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"But you must proceed with caution, or you will get fleeced," Zweig wrote. For stocks you pay a transparent commission. But bonds have no stated commissions. Instead, the dealer marks up the price to make a commission.

Dealers generally don't disclose their mark-ups. But they "can be monstrous," Zweig noted.

A study by research firm Securities Litigation and Consulting Group, covering the period from 2005 to this April, found that for investors who bought $250,000 or less in municipal bonds, they paid a markup of at least 3.04 percent in one out of 20 cases.

"Federal rules require that markups be 'fair and reasonable' but don't define those terms exactly," Zweig explained.

Despite progress by Jefferson County, Ala., to settle its bankruptcy last week, New York Times columnist Floyd Norris sees more muni troubles on the horizon.

"Large municipal bond disasters have been rare, but I suspect there will be more," he wrote. In Jefferson County, an agreement has been reached to stick a 20 percent loss on holders of triple-A bonds.

"The Jefferson County bankruptcy may serve as a precedent for forcing bondholders to take losses in bankruptcy," Norris said.

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With municipal bond yields near 15-month highs, you may be tempted to buy. But be careful of price mark-ups, says Wall Street Journal columnist Jason Zweig.
Zweig,mark-ups,muni,bonds
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2013-45-10
Monday, 10 June 2013 11:45 AM
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