The size of the U.S. municipal bond market is US$2.7 trillion. Before the crisis about half of the muni bond universe was insured by monolines who 'wrap' lower rated muni bond issues with their AAA rating against a fee. In normal times, tax-exempted general obligation muni bonds yield less than Treasuries. With the onset of the crisis and the demise of the monoline insurers, the muni bond market has been split into haves and the have-nots (see Cumberland). The Economist estimates that about one third of the final demand stemming from off-balance sheet vehicles such as Tender Option Bonds (TOB) and Variable-Rate Demand Obligations (VRDO) (i.e. commercial paper equivalent), as well as Auction Rate Securities (ARS) and closed-end funds, has disappeared. After the administration pledged US$150 billion from the stimulus towards states and municipalities with the launch of the Build America taxable bond subsidy, the muni bond-Treasuries relationsip is slowly reapproaching a more balanced relationship with the yield ratio at around 100% but not yet at the pre-crisis average of 85%.
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