Traditionally, municipal bonds have been sold to investors in units of $1,000 or even $5,000 or $10,000 per bond, a size that deters many smaller investors or leads them to turn to a bond fund.
Now California, a state that has often been an innovator in many areas, is doing something about that.
Gov. Jerry Brown this week signed a bill authorizing the nation’s largest issuer of municipal debt to begin issuing and selling mini-bonds in denominations as small as $25 apiece.
The goal of the bill is to allow the state’s issuers to attract the interest of a much broader range of investors who may not have even thought of buying bonds before.
Financial advisors should also benefit by having an expanded bond product line to offer clients who might otherwise never have thought about buying bonds.
The new mini-bonds, regular zero-coupon and capital appreciation bonds, would be traded on the New York Stock Exchange, according to State Treasurer Bill Lockyer, who developed the mini-bond concept.
A number of other states have begun issuing bonds in smaller denominations in hopes of increasing the market for their issues, including Massachusetts, which last May sold $5 million of $490 million in debt in $1,000 increments, rather than the usual $5,000 issues, Minnesota ($1,000 denominations) and Bergen County, New Jersey, which sold bonds to individuals in denominations of $610 to finance public parks improvements.
California will be going to investors on Sept. 19 with a 2.9-billion general obligation bond issue but Lockyer said it will not include any $25 mini-bonds.
Once the state does start selling bonds in $25 denominations -- and if the program proves popular with investors -- other states could be expected to follow suit in offering smaller denomination bonds.
Lockyer developed the idea after hearing input from several banks, including Morgan Stanley, Citigroup, Wells Fargo and RBC Capital Markets over the last two years.
The banks collect fees for handling bond transactions, and would earn higher fees if the unit size of transactions fell from $1,000 to just $25.