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Abstract: 

After nearly becoming extinct under the Volcker Rule, the tender option bond (TOB) market has made an impressive comeback, as both Wall Street and Main Street have found a new path to finance bond positions. Now, the Volcker Rule is under consideration for relaxation such that TOBs may benefit from deregulation. At the same time, tax reform has affected borrowing and investment strategies alike. Given the importance of this sometimes opaque market in absorbing municipal bond supply and the involvement of mutual funds, banks, hedge funds, and a variety of issuers and credits, it is imperative that municipal analysts understand how and why TOBs exist. This article is based on a discussion by the same title conducted at the 36th Annual Conference of the National Federation of Municipal Analysts held in Charleston, South Carolina, May 7–10, 2019. John Vetter is a municipal structured analyst at Fidelity Investments. Steven M. Hlavin is managing director and portfolio manager at Nuveen. A second panelist is head of public finance products at a securities firm. The conference proceedings are being published in a special double issue of Municipal Finance Journal, as Volume 40, Number 4 and Volume 41, Number 1.

Keywords: Tender option bond (TOB), Volker Rule, deregulation, municipal bond supply, TOB market

Affiliations:  1: Fidelity Investments; 2: Nuveen.