Saturday, March 01, 2008


The wizards at the hedge funds made some bad bets and that means 3rd parties will suffer from their mistakes. In this case, the 3rd parties are municipalities who use bonds to raise money for various projects. The hedge funds had to sell their bonds at pani prices and that means that the interest rates for municipal bonds has risen dramatically. Here's what the WSJ wrote:
Hedge Funds' Fire Sales Send Muni-Bond Yields To Historic High Levels
By Michael Aneiro, Tom Lauricella and Liz Rappaport
Months of turmoil in the municipal-bond market, long a placid haven for individual investors, reached a boiling point Friday -- as hedge funds were forced to unwind complicated bets and in the process dump billions of dollars of the securities.

As a result of that surprising forced selling, yields on debt from municipalities and other tax-exempt issuers jumped to their highest levels in history, when compared with safe debt issued by the U.S. government. The average AAA-rated, 30-year municipal bond yielded 5.14% Friday afternoon, compared with 4.42% on a U.S. Treasury 30-year bond.

Hedge funds not only operate in private, they also are involved with securities that can be kept "off balance sheet," thus provide 2 sources of opacity in the market.

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