Muni Bonds: Why States Are Chasing Retail Investors

Business Week reports:

State and local governments have increased their efforts to market muni issues directly to retail investors—taking out ads in newspapers and doing radio promotions—instead of letting them find brokers to sell the bonds to them after the initial offering at a markup. Boosting interest among retail investors has been a matter of survival for some states since the collapse of muni arbitrage funds and the retreat of other institutional buyers in early 2008.

Muni arbitrage funds were a vehicle for hedge fund managers to buy long-dated, fixed-rate muni bonds, and then use the coupon payments as collateral to back floating-rate bonds the funds would sell to investors. These funds had accumulated $160 billion to $180 billion in assets by the end of 2007, when many of those strategies began to falter, according to Matthew Posner, a director at Municipal Market Advisors, a Boston-based independent strategy, research, and advisory firm in the municipal bond industry.

A matter of "survival".