Demand from separately managed accounts (SMAs) has become a more important force in the municipal market, shaping where buying interest sits and how bonds trade, two market players said.

Growth in municipal SMAs became easier as algorithmic trading lowered the cost of executing retail-size bond lots and portfolio management tools became more widely available, Jeff Timlin, managing partner and lead portfolio manager for Sage Advisory, said.

These technological improvements made execution easier and removed many of the barriers to building SMA platforms, he added.

The shift also reflected a stronger push for more fine-tuned risk control after 2008, Timlin said. He described 2008 as an important catalyst for broader SMA adoption, as more investors wanted tighter control over risk and portfolio profile coming out of that period.

The change is also showing up in small-size trading, where the old assumption that odd-lot customer trading is mainly retail no longer holds, according to a 2025 Municipal Securities Rulemaking Board (MSRB) paper on small-size trades.

Institutional dealers accounted for 44% of odd-lot customer trades in 2024, that report found. It also said it was highly likely that at least 50% of odd-lot customer transactions occurred with institutional clients, with SMA growth likely a significant cause of that shift.

Odd-lot liquidity has improved over the last decade, driven largely by algorithmic trading and tighter bid-ask spreads, Andrew Clinton, CEO of Clinton Investment Management, said. However, the odd-lot segment remains the most expensive area of the market, he added, because that is where the widest bid-to-offer spreads persist.

SMA demand clustered inside 10 years

“We still see heavy demand for munis under 10 years from passive SMA managers and laddered strategies,” Clinton said.

Within that range, the 2–7-year segment is currently unattractive for many short-duration SMA mandates, he added. Low absolute yields and poor taxable equivalents make these short-duration strategies an inferior solution, and this is exactly where most SMA mandates are overweight, the investor added.

More broadly, money from SMAs has moved into shorter and intermediate maturities, particularly 10 years and in, Timlin said. He said that was one of the primary reasons muni-to-Treasury ratios in that part of the curve have traded at lower levels over the past five years or so.

MSRB’s 1Q26 summary said the market continued to see strong interest from individual investors, including SMAs, while trade count rose slightly from 1Q25 and average trade size continued to decline to below USD 204,000.

A February Western Asset report suggested high demand for SMA strategies concentrated in shorter maturities had distorted relative value. Triple-A municipals maturing inside 10 years yielded less than comparable Treasuries on an after-tax basis, the report said.

Most strategies remain boxed into 1–10- or 1–15-year constraints, which Clinton said are sub-optimal for maximizing tax-free cash flow and can leave investors missing the highest yields and best total return potential further out the curve.

Investor behavior also played a role in that demand shift, Timlin said. Municipal SMA investors see their individual bond holdings on account statements, unlike investors in pooled vehicles, and many became less comfortable owning very long-stated maturities once they saw what they actually owned. Still, that pattern may now be starting to evolve a little. Timlin said the 10s30s municipal curve has become attractive enough to draw some interest further out.