Street.Com – Demand for the dullest of assets — yes, that’s right, municipal bonds — has gotten a recent boost from hedge funds.
These private investment partnerships are using muni bonds to juice their investment returns, which aren’t as stellar as they were a few years ago. But hedge funds aren’t just buying the bonds and collecting interest.
Rather, they are employing various arbitrage strategies to profit from the difference between the yields paid by longer-dated muni bonds and other, shorter-dated securities. One such strategy involves using the bonds as collateral in trusts that issue variable-rate notes.
Demand from these kinds of programs has boosted prices on municipal debt and enabled this asset class, which is usually associated with predictable, if unexciting, tax-free income, to outperform both U.S. Treasuries and corporate bonds for the past three years, according to data from Bloomberg.
