http://www.thornburginvestments.com/pdfs/TH3163_Hidden_Risk_Muni_Market.pdfReduced municipal-market liquidity has forced managers to operate in a less benign environment, since the implementation of the Dodd-Frank Act and the exclusion of municipal bonds from the approved list of high-quality liquid assets (HQLAs), according to Nick Venditti.
"Liquidity in the municipal bond market is unique relative to that of other asset classes. Unlike the equity markets, where on a given day an investor can key in a ticker symbol and buy any amount of stock at the current market price, municipal bonds don’t have a quoted price. [...] If municipal demand is weak, (mutual funds) may be forced to sell at distressed prices, adversely affecting the portfolio’s performance. During past periods of disruption, the large investment banks would typically step in and create a price floor, effectively operating as buyers of last resort."
As Snooky's Jersey friends were prone to say, "What we have here is a [changed] sit-u-a-tion."
If we were to have a major liquidity event, I wonder if the ramifications for the muni market, esp. junk, are close to estimable.
