Brokerage Days: Municipal Bonds and Yield to Broker

Because I worked in South Florida, we sold a lot of municipal bonds. Wealthy retired people buy a lot of munis and there are a lot of wealthy retired people in Florida. The reason: interest on municipal bonds is tax-free based on the legal principle that different levels of the government cannot tax each other. So the Federal Government cannot tax the interest on bonds issued by states and municipalities and their political subdivisions, which include such entities as water and sewer authorities, which sell lots of bonds. Conversely, if you live in a state with an income tax, interest you receive on US Treasury instruments cannot be taxed by your state.

In those days, the early to mid 1980s, muni bonds had two points in them which means a commission of two percent of the trade goes to the broker. Bond yields were very high, 9 1/2 percent for AA muni-bonds, so there was a lot of room to take something for yourself and the firm. These days brokers don’t get that much. Each time we made a big bond trade to a customer of muni-bonds, and a big sale for retail brokers in those days was $100,000 or 100 bonds, we would yell it out to our pals. “What’s the YTB?” friends would ask. This meant, “yield to broker.” And we would tell everyone how many points we received. High fives.

In muni bonds there are two measures of yield or percentage of income from the bond: YTM and YTC. YTM, the “Yield to Maturity”, is until the bond matures and the owner receives the principal back. Maturities are often long: twenty or thirty years. So all muni bonds are “callable” by the issuer after five or seven years. Say Arrowhead County Water and Sewer Authority issues 50 million worth of bonds paying 5% interest and they issue those bonds at par which means one hundred cents on the dollar. Interest rates go down in the intervening years and when the callable date is reached Arrowhead calls all of their bonds and reissues them at a lower rate.

Because all bonds are callable, brokers must quote the YTC, “Yield to the Call,” which is lower than the YTM. To this measure we added the most important one to us: “Yield to Broker.”

Here is a classic photo of a broker reading the tape. Although long gone, the stream of stock trades and prices shown on electronic scanners which display stock prices in brokerage firm offices and on the sides of several buildings in New York are referred to in the trade as “the tape.” Sometimes the New York Stock Exchange is so busy that one will hear journalists say “the tape is running ten minutes behind.” What they mean is the electronic display boards are not showing the latest trades and prices–which is the info shown on the tape.

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Charles McCain

Charles McCain is a Washington DC based freelance journalist and novelist. He is the author of "An Honorable German," a World War Two naval epic. You can read more of his work on his website:

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