Municipal VRDNs Offer Liquidity and Tax Advantaged Income

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Municipal VRDNs Offer Liquidity and Tax Advantaged Income

Thomas Casey

Thomas Casey - Senior Portfolio Manager, Tax Sensitive Strategies

Money market mutual fund reform has caused a dislocation in the short term municipal market, reducing liquidity and increasing operational complexity for prime funds. Variable Rate Demand Notes (VRDN) are a vehicle for investors to meet their needs for principal preservation, liquidity and competitive yields, as well as a means to achieve the tax advantages of municipal bonds. Like fixed rate municipals, VRDNs are issued by state and local governments, and revenue authorities, mostly to finance public infrastructure projects. VRDN income is tax free, and adjusts on a periodic basis based on the yield of the Securities Industry and Financial Markets Association (SIFMA) Index, the municipal market’s equivalent of LIBOR.

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