Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Historical High Yield Opportunities

Over the years, the funds have successfully exploited many high yield/distressed opportunities, spanning a wide range of sectors. In the mid-1980s, the first oil bust (the same one that took down the infamous Penn Square Bank) led to a buying opportunity in Texas single-family housing bonds. At the time, the Lone Star State was still very dependent on the oil industry, and thus suffered a severe economic downturn when oil prices crashed from $30 to around $10 a barrel. In a situation rather reminiscent of the current housing crash, foreclosure rates shot up among many of the affordable housing developments financed by bonds issued by local housing agencies. Many homeowners opted to walk away from their homes and their mortgages. The threat of default led to panic selling on the part of then-current housing bond holders, with bonds trading as low as 25 cents on the dollar. Yet, upon closer examination, many of these issues turned out to be worth much more than their current trading level, as most of the underlying mortgages carried several layers of mortgage insurance. Many of the high yield muni funds saw the value, scooped up the bonds, and the rest is muni history.

Other large-scale high yield opportunities came from the corporate-backed tax-exempt sector, which allowed the muni funds to play distressed corporate names (see Chapter 7 for a more detailed look at this sector). For instance, when the U.S. steel industry went through the first ...