Quirks of the Muni Bond Market

What could cause the municipal bond market to finally reverse? Munis are a tricky market. Taxable bonds (Treasuries, corporates, mortgage-backed securities, etc.) have a deep and varied investor set, from total return accounts to foreign entities to hedge funds. Although the prevalence of leveraged players is much less than it was before the financial crisis, many of these investors are willing to borrow and buy taxable bonds when the value is right. It is also relatively easy to hedge taxable bonds, and a wide variety of liquid hedges are available. That means that when there are severe selloffs, either in fixed income generally or in specific bonds, value-oriented buyers can step in. 

In munis, there really are only two buyers under normal circumstances: individual investors and property-and-casualty insurance companies. The latter group tends to own fairly short bonds, as they are trying to match their liabilities. Because of this matching, they tend not to be opportunistic in their thinking. Individual investors are notorious for following market trends, not leading them. Hence when the muni market is selling off, individual investors rarely step in and buy. They are usually the ones who are scared and doing the selling....588 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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