The flight from risk hit muni bonds, too

The $2 trillion market for tax-free bonds, generally those issued by states, cities and other municipal government bodies, has long been considered a sleepy corner of the fixed-income world. And it’s true that many buyers of muni bonds are wealthy senior citizens who have no interest in trading or doing much of anything beyond collecting their tax-exempt interest. But in recent years, the muni market has been invaded by a host of racier investors, mainly hedge funds, seeking to buy up bonds and repackage the cash flows. These kinds of traders try to profit from the difference in yield between short and long-term rates as well as the difference between the taxable and tax-exempt markets. And that makes the muni market a whole lot less sleepy than it used to be.

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