As high net worth investors and mutual funds exit the muni market, a new investor class has moved in. Who’s buying? Hedge funds! For the last month or so, large hedge funds have been snapping up muni debt like crazy.
The Wall Street Journal reports: “Muni yields, which move in the opposite direction of price, have hit their highs at a time when yields on other fixed-income classes, like high-yield corporate debt and some sovereign debt, have fallen. That means the difference, or “spread,” between the two yields has widened, providing an appealing relative return proposition for hedge funds.”
This development is viewed as a positive sign; a vote of confidence, if you will. But hedge funds aren’t coupon-clippers. They don’t wait around for the checks to arrive in the mail. Hedge funds are all about leverage and capitalising (fast) on what they hope are price distortions.
Short-term, the fact that hedge funds are buying up billions of dollars worth of munis adds stability to the market. But it won’t last, because the hedgies won’t stay.
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