SAN FRANCISCO (MarketWatch) Hedge funds that trade municipal bonds have been hit by margin calls in recent days and some are having to sell positions to meet those obligations, according to a leading investor in the market.
Problems with bond insurers and other disruptions from the global credit crunch have pushed yields on muni bonds close to, or above, those of comparable Treasury bonds. That’s hurt hedge funds that try to make money from the difference, or spread, between those yields. Muni bonds usually yield less than Treasurys, partly because they are tax-exempt.
The disruptions have encouraged banks and brokers that lend money to muni hedge funds to pullback and impose more margin calls. (Margin calls happen when securities bought with borrowed money lose value. If they drop too far, brokers require that more cash be deposited in an investor’s account to support the position. Otherwise they must sell some of the assets.)
