Threat to Tax-Exempt Money Funds Over, Poor Yields Now Main Concern. The danger that downgrades in municipal bond insurers MBIA, Ambac, etc., posed to tax-exempt money fund portfolios has passed say fund managers. However, as the Wall Street Journal points out this morning, the issue is now finding new supply to replace all the insured variable-rate demand notes and tender-option bonds that were "put" back over the past two weeks. (Tax-exempt funds have the option to return most securities to dealers every 1- or 7- days.) The Journal piece, "Funds Feel Dearth of Tax-Free Securities," points out the fact that municipal funds may at times invest in taxable securities and that some funds have recently reminded their investors of this fact. We don't expect any funds to have done this in any significant way, however, and would advise investors not to worry about this issue. The more important points, which the WSJ misses, are that the danger of monoline insurer downgrades has passed, and that temporarily poor yields are the primary result of the mini-crisis as money goes uninvested or as funds bid up the prices of the high-quality uninsured debt. The problem should correct shortly, however, as yield-sensitive money flows back into the more advantageous taxable sector and as new issuance fills the supply void.

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