Muni mania

A variety of structured products based on US municipal bonds has sprung up this year, enabling investors to benefit from the steepness of the muni yield curve. Asian investors, in particular, have been big buyers - but are they fully aware of the US tax risk they are taking on?

Municipal bonds have been a favourite of 'mom and pop' investors in the US for years. The tax-exempt status of these instruments - domestic investors don't have to pay US federal taxes on any interest income - has been a big draw for mutual funds, insurance companies and retail investors. However, municipal bonds have also roused the interest of investors outside the US. In particular, there has been strong demand from European and Asian investors for structured products based on municipal bonds