A price efficient market refers to a market where the prices at all times reflect all available information that is relevant to the valuation of the securities. The U.S. Treasury bond market is considered the most efficient market in the world. When a market is considered price efficient, a strategy cannot return superior returns after adjusting for risk relative to market performance. An investor accepts the implication that attempts to outperform the market cannot be successful systematically. Any alpha (a measurement of a manager’s out-performance of the market that is attributed to skill) created through a strategy implemented in an efficient market can therefore be considered luck. Conversely, a price inefficient market can offer additional return to a client’s portfolio after adjusting for risk relative to market performance.

With the many different buyers, each in need of a particular bond that meets their individual investment objectives, the value of a Municipal bond remains extremely subjective. There is no double-clicking on the mouse to sell a bond where 8 bidders are within 1/16 (in dollar) of one another.  So long as the individual investor’s needs drives this market, each basing their investment decisions on geographical preferences to attain in-state tax-exemption on interest income, the Municipal bond market will continue to trade inefficiently for years to come. Even with today’s price transparency, the opportunities for an experienced portfolio manager to add alpha to their absolute returns continue to be endless.