Hedge Funds Municipal Bonds

Hedge Funds Looking to Short Municipal Bonds

Hedge funds are looking for a way to short municipal bonds. The financial instability of states in America that are bogged down by debt and in danger of defaulting has drawn the attention of hedge funds. Hedge funds would like to bet on the bonds' creditworthiness.

How do you “short” an indebted US state? As fears grow over the scale of a crisis some believe could rival the debt problems of the eurozone, hedge funds and other investors are looking at how to trade the market in America’s municipal debt.

For decades, this $3,000bn bond market was safe, predictable and dull. The traditional buyers of the bonds issued by states, cities and other local bodies were wealthy local residents lured to them by the tax breaks on offer for individual investors. They bought the bonds, held them until they matured and then bought more.

Not now. State deficits have ballooned, local authorities are grappling with huge public sector pension liabilities and triple A bond insurance that used to prop up even the riskier municipal bonds is harder to find. Source

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