Buying and Selling Munis

While the muni bond market is active, with a daily trading volume in excess of $10 billion, some bonds are more liquid than others. Some bonds trade actively, while others may have no activity (no interested buyers or sellers) for weeks at a time. As a general category, municipal bonds tend to be more sensitive to forces of supply and demand than other fixed-income categories. This has the net effect of increasing your market risk: If your bond is out of favor with other investors at the time you need to sell, the price you will get for the bond in the secondary market will suffer. And of course, like all bonds, munis are subject to interest rate risk—if rates rise above the rate of your bond, the value of the bond in the secondary market declines.

Because of the dizzying number of muni bonds available (virtually no two bonds are alike), and the fierce competition among dealers to gain a piece of the business, you should enter into muni investing with care. Do your homework, starting with the selection of an investment professional with a proven track record of municipal securities expertise.