We compare trading costs in the U.S. Treasury bond market with 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 8 cents for Treasury bonds. Maturity, trading volume and credit ratings are key determinants of the bid-ask spread. After controlling for credit risk, the bid-ask spread is not statistically different for the corporate in Treasury markets but is higher for municipal bonds relative to Treasuries. Finally, we examine why institutions sometimes trade without dealers, and find that the relative volume of directly negotiated trades in a bond decreases in the bid-ask spread and the trading volume, and increases with age of the bond.
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