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BlackRock, Nuveen Unwind Leveraged Muni Trades Roiled by Havoc

  • Mutual funds unwind $1.2 billion tender-option bond trusts
  • Move contributes to flood of debt hitting the market
A pedestrian walks past BlackRock headquarters in New York.
A pedestrian walks past BlackRock headquarters in New York.Photographer: Bess Adler/Bloomberg

Large municipal-bond funds run by BlackRock Inc., Nuveen, Pacific Investment Management Co. and Invesco Ltd. are unwinding a leveraged investment strategy that backfired this month, contributing to the flood of debt that’s been unloaded during a record-setting sell-off.

Last week, fund companies began liquidating about 75 so-called tender-option bond trusts holding $1.2 billion worth of state and local government debt, according to data compiled by Bloomberg. The trusts issue floating-rate notes to money-market funds and use the cash to buy higher-yielding long-term bonds. Mutual funds seek to pocket the difference in yield between the two.