Municipal bonds have dramatically underperformed high quality taxable bonds with price weakness reminiscent of the late February sell off. Forced liquidiations resulting from the latest round of financial markets turmoil was the primary driver, but money market mutual fund fears and poor liquidity also played a role.

Money fund liquidations, including an 8% contraction in tax-exempt funds, overwhelmed bond dealers who were unable to absorb the supply. The result was a sharp spike in yields for Variable Rate Demand Notes (VRDNs), a security that makes up the bulk of municipal money market fund holdings.

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