Municipal bond flipping: what you should know 

State and local governments and agencies expect to be treated fairly when they access the municipal bond market to finance or refinance capital projects. Underwriters should charge a fair price for services provided and the bonds they sell should be priced to sell to buy-and-hold investors.  Unfortunately, some underwriters sell primary offerings to investors who then quickly resell or “flip” the bonds for a profit.

This practice of flipping is a major indicator that the initial offering is underpriced, resulting in the bond issuer incurring higher yields than are necessary to sell the bonds to longer-term investors.  A September 2019 Wall Street Journal article found that, from 2013 to 2017, approximately $60 billion in new-issue bonds were sold to customers who resold their positions within a single day.

Fortunately, there are measures issuers can take to reduce the likelihood their bonds will be flipped. 

• Have your debt policy include a requirement that your municipal advisor prepare a post-issuance trade analysis for every bond issue sold at negotiated sale.
• Prior to selling the bonds, request pricing information for similar issues that have recently sold.  The underwriter should provide an analysis of adjustments made for pricing date, security, state of issue, etc. that derives the proposed pricing for your issue. This is consistent with GFOA’s best practice on Pricing Bonds in a Negotiated Sale.
• Inform your bond underwriter that a major component of their performance evaluation will be secondary market trading efficiency.
• Have your municipal advisor prepare a secondary market trading report for every bond issue sold at negotiated sale and review the results with the bond underwriter.

Bond flipping is the result of inefficient pricing that allows investors to profit at the expense of issuers.  Taking prudent steps to verify your pricing is on market will help deter flipping and improve your odds of achieving cost-effective bond financings.   

For more information on this topic, or to learn how Baker Tilly municipal advisory specialists can help, contact our team.

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