Do Differences in Transparency Affect Trading Costs? Evidence from U.S. Corporate, Municipal and Treasury Bond Markets.

We compare trading costs in the transparent U.S. Treasury bond market with the less transparent U.S. corporate and municipal bond markets, based on newly available transaction data. We estimate that the mean bid-ask spread per $100 par value is 23 cents for municipal bonds, 21 cents for corporate bonds and 11 cents for Treasury bonds. But after controlling for interest rate risk, credit risk and trading activity, we find that the bid-ask spread is not significantly different between the three markets. Our findings suggest that markets with different levels of transparency may nevertheless have similar trading costs. Finally, we examine why institutions sometimes trade without dealers, and find that the relative volume of directly negotiated trades in a bond decreases in its bid-ask spread, interest rate risk and adverse selection risk and increases in its activity level.