Municipal Bond Forum
On The Reality Behind the Bond Market Shakeup contd #3
Q
How will the potential hedging of the tender-option-bond-programs, or unraveling of these trades, affect the value of AAA-rated insured bonds? Will this seriously harm bond values and is it a transitory effect?
A
James A. Klotz responds:
Yes, high-grade bond prices have been impacted by the unwinding of some of these programs.
Tender-option-bond programs sell lower yielding short-term notes and invest in higher yielding long-term municipal bonds, pocketing the difference. These often highly leveraged programs are run by hedge funds and banks. They account for approximately $200 billion of municipal bond holdings.
Large hedge funds have been liquidating these long-terms bonds, putting pressure on all municipal bond prices.
To add insult to injury, the funds that had been big buyers of bonds in the past few years are no longer lending support to the market.
The good news is that these conditions, which should be transitory, are currently providing unique buying opportunities for high quality bond investors.
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This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.