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Minyan Mailbag: Who's Buying Municipal Bonds?


Your financial queries answered.

Prof. Sedacca,

In the last two or three weeks Munis have had a huge move. Given the very large supply that was coming, who bought all these?

We were seeing coupons of 5 1/2 at par or a small discount, all of a sudden we're at 5s at par or a small discount. Also, what about the pricing services that have no idea about the correct prices of these securities? If you look at a priced muni in a clients portfolio, and then at trace, there seems to be no basis for the estimated price.

Inquiring minds just want to know.

Keep the faith.
Minyan Charles


The municipal bond market is undergoing a huge sea change. When MBIA (MBI), Ambac (ABK) and FGIC were considered solvent, anything that was insured was priced on the same 'matrix'. In other words, there wasn't a heck of a lot of research being done on the underlying credits. All AA and A paper were priced the same, sans hospital and airport bonds. That said, when the Auction Rate Security (ARS) situation arose in concert with the credit crunch and MBIA/FGIC mess (contagion anyone?), it made three things occur.

1) Those that had ARS reset to max rate and had good underlying credits simply retired the ARS and went to the Variable Rate Demand Notes (VRDNs)or fixed rate route (or a combination thereof).

2) Those that reset to max rates with poor underlying credits were simply forced out of the fixed rate market and are stuck paying the max rate (just ask any hospital system that canceled orders with General Electric's (GE) Health care division).

3) The market for State General Obligation bonds (GOs) became the safe haven of munis as though they have full taxing powers.

The municipal bond market is now going to trade more like the corporate market where each credit is priced on its merits not on a matrix. So for individuals, staying away from individual issues is likely the best route in favor of something like a Vanguard fund with low fees. Even as an institutional investor, I don't feel like I have the skill set to track 50,000 credits.

Hope that helps.


PS I think it gets more unruly, not less.
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