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March 14, 2000, 10:55 a.m. EST

Web making muni bonds more accessible to individuals

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By CBS.MarketWatch.com

WASHINGTON (CBS.MW) -- Interested in muni bonds? You're not alone. Although a $5,000 minimum still limits municipal bond investment to mature, wealthy individuals, Internet resources for researching, pricing and buying the securities are booming. The result? A market that once resembled an invitation-only country club party is turning into one that offers the variety and accessibility of an all-you-can-eat buffet.

The $1.5 trillion muni bond market doesn't necessarily allow the simple point-and-click satisfaction investors enjoy with stocks and mutual funds. Among the daunting investment considerations you'll encounter are arcane credit ratings, varying durations and yields, and sometimes-complicated tax compliance issues.

Still, many investors -- especially those in search of tax shelters -- will find that the learning process is worth the effort.

Municipal bonds have two principal qualities that make them attractive to investors: They?re free from federal, state, and some local taxes, and their proceeds go toward projects that benefit the public -- new roads, schools, even sports stadiums.

Even if you rely on a finance professional for investment advice, you'll find plenty of useful background on municipal bonds on the Web.

Where to start: research

Clueless investors might begin their research on The Bond Market Association?s Web site, http://www.investinginbonds.com , suggests Arthur Sinkler, president of MuniDirect.com, a novel online brokerage firm thatallows individual investors to purchase bonds directly via the Web.

A click on MuniDirect.com gives investors two paths to follow, explains Sinkler, whose site launched the first of its weekly auctions last week. Experienced visitors can find bonds by typing in specific qualities of the security they're looking for through "Detailed Search." Those just getting their feet wet can experiment with "Muni Wizard."

How muni market commissions and pricing work had long been one of the biggest secrets on Wall Street, although these barriers had started to come down even before brokers began Internet posting.

MuniDirect charges no more than a $5 commission on a typical bond with a face value of $1,000 -- but remember you'll have to start with a $5,000 order -- and sometimes charges less. Typically, bond brokers may pocket $10 to $30 per bond or up to $70 when lower-quality but higher yielding bonds are sold.

Still, critics of a MuniDirect system point out that lower commissions come at the expense of a large inventory of bonds. While MuniDirect's database is growing, some states, cities, and municipalities still opt to issue through mainstream brokers because they provide underwriting and other services. And, in exchange for higher commissions, traditional bond brokers sometimes shoulder some of the losses a bond may incur.

Customer base

Statistics are proving that the age and income level of the average muni investor fit the demographics of individuals most likely to invest online, noted Sinkler, who said his average customer is about 55 years old.

A group of Wall Street heavy hitters -- including Goldman Sachs Group Inc., BondDesk.com LLC, Susquehanna Partners GP, Paine Webber Group Inc., and Bear Stearns & Co. Inc. -- said last week they joined to create an online industry-wide municipal bond marketplace, MuniGroup.com LLC. The site is pending Securities and Exchange Commission approval.

Sinkler said there are about 40 Internet sites that sell bonds, although he claims that his is the first to sell munis directly to individuals.

MuniGroup, for example, will sell bonds to brokerage houses, which will then sell the bonds to individual investors.

Still, a migration online is indicative of the evolution taking shape in a marketplace that was once dominated by a select group of brokers able to keep price information essentially under wraps and the institutions, such as life insurance companies, that needed municipal bonds. Now, households directly hold 30 percent of munis and when tax-free mutual funds, money market funds and closed-end funds are included, that figure climbs to 72 percent.

Consider bond funds

An investor ready to take a nibble of the market rather than a bite might consider a tax-exempt bond or money market fund, suggests Reno J. Martini, chief investment officer with the Bethesda, Md.-based Calvert Group. His firm manages $4.8 billion in tax-free and taxable bond funds that recently earned top billing from Barron's.

A fund manager can conduct daily credit research, keep closer tabs than busy investors on the debt market, and offer a variety of bonds to maximize return and weather the ups and downs. Martini, whose tax-exempt funds carry a smaller $2,000 "cover charge" to get in, says his average investor is between 40 and 60 years old and may want to look at the relative cheapness of munis to Treasurys right now.

"The data we are seeing (shows) that more individuals are seeking financial help" with their investments, he added. is an online reporter for CBS MarketWatch.

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