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By Joan Gralla and Anastasija Johnson
NEW YORK, March 3 (Reuters) - A Blue River municipal bond fund whose heavy selling battered the market last week on Monday got new cash, according to JPMorgan (JPM.N: Quote, Profile,Research), which said it had persuaded new and existing investors to invest.
Blue River was was one of the three hedge funds that sold billions of dollars of muni bonds last week, pushing the $2.6 trillion muni market to nearly five-year lows. The hedge funds were forced to sell because their borrowing costs jumped due to concerns about troubled U.S. bond insurers.
By Monday, these discounts had prompted inquiries from potential new buyers, traders said, though they still feared the selling was not yet over. Other hedge funds that also have big paper losses might be tempted to sell if the market improves, explained George Strickland, managing director at Thornburg Investment Management in Santa Fe, New Mexico
Spokesmen for the other two hedge funds that traders said were also selling -- Duration Capital and 1861 Capital Management, were not immediately available.
JPMorgan in its statement on Monday said it is committed, "on a best efforts basis, to engage with existing and new investors to raise additional significant capital to be managed by Blue River Asset Management in the same strategy."
Traders said the fund, the Blue River Muni Bond Opportunity Universal Unit Trust, had been selling municipal bonds for some time.
Since the program began in 2003, investors in Europe and Asia have invested $1 billion.
A London-based spokesman for the bank, whose parent company is JPMorgan Chase & Co, declined comment. Robert Bigelow of Blue River Asset Management, who runs the program, not immediately available.
On Monday, the municipal bond market achieved a bit of stability after plunging on Friday to historic lows due to the massive selling by hedge funds and other big players that had accelerated all last week.
Many hedge funds and so-called tender option bond programs buy long-term muni bonds and finance them by selling floating rate notes.
After getting slammed in August when the global credit crunch first took hold, hedge funds and tender option bond programs got hit much harder in late January because two main short-term markets froze.
Investors in auction rate and variable rate demand notes swamped dealers with masses of debt that was backed by insurers who were no longer deemed creditworthy because the companies could lose billions of dollars from subprime mortgage plays.
One indication of the size of the selling by these programs was seen in a JPMorgan report, which on Friday estimated tender option bond trusts totaled $150 billion.
That is about $50 billion or so less than earlier estimates by other banks.
These programs often sweep into the market when municipals look cheaper than other investments -- and now the tax-free sector offers exceptional bargains.
On Friday, for example, 10-year municipal bonds with top notch ratings yielded 117 percent of 10-year Treasury bonds, an exceptional development. For the past 10 years, this gauge has averaged only 84 percent, according to Municipal Market Data. Municipals usually yield less than Treasuries because their income is tax-free.
Hedge funds and tender option bond programs that believe the ratio will return to its historic level might be tempted to launch new programs -- if they can find the cash.
On Monday, traders said retail buyers, insurance companies and players who do not normally dabble in municipals bonds all were interested in buying. And some broker/dealers were starting to stock their shelves so that they would have tax-free bonds for their retail clients.
(Reporting by Natalie Harrison in London, Joan Gralla and Anastasija Johnson in New York.)
