Bond Buyer Summarizes "Short-Term Credit Effects" in Municipal Market. In the most comprehensive article on the topic to date, Friday's Bond Buyer article "Short-Term Credit Effects: VR Notes, Auctions Point to Problems" discusses some possible problems caused in the short-term municipal money markets by potential downgrades of municipal bond insurers. It says, "The precise problems now being seen in the short-term market relate to the liquidity function of the securities held by money market funds. The dealers that sold the variable-rate demand obligations and the tender options bond floaters to the funds in the first place -- which provide a put or tender option if the investor wants to sell the bonds back -- can walk away if the bonds fall below the double-A rating.... It is those risks that have led funds to begin selling the short-term securities back to the dealers." The article adds, "Some TOB programs have taken proactive steps to ensure that the liquidity function is preserved, and to reassure the money market funds that are their clients." Overall, the biggest concern to date appears to be trouble with supply for money funds and the corresponding low yields on desired product. Muni money funds have already significantly reduced their potential exposure to downgrades via "putting" back supply to dealers and municipalites, and via new purchases of securities that aren't reliant on any muni insurer ratings.

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