What is behind Muni's yield shot up

--Municipal debt has been offering richer-than-normal yields compared with Treasurys since late last year. Only in the past week have they shot up significantly. Behind the move: forced selling by hedge funds and other traders as they unwound complex bets gone wrong. --Although municipal debt historically is the domain of individual investors, in recent years hedge funds had flocked to a trading strategy that hinged on the normally reliable wide gap between yields on short-term and long-term municipal securities. --The hedge funds sought to profit from that gap by borrowing at the lower short-term rates, buying longer-term higher-rate municipal debt and pocketing the difference. They magnified this trade by borrowing heavily to make this bet, sometimes using 10 times debt for every dollar of investor money they were putting to work. At times they also layered on bets against U.S. Treasury securities. --The strategies have gone haywire lately, with both Treasury yields and municipal-bond yields going against these trends -- with Treasurys strengthening and municipal debt weakening. One problem: many municipal bonds are guaranteed by bond insurers such as Ambac Financial Group Inc. and MBIA Inc., which in turn enable those offerings to receive the highest credit rankings from rating providers. The bond insurers have run into trouble because of their exposure to risky-mortgage debt. Investors in turn became worried the municipal-bond guarantees would suffer, hurting municipal bonds and sending their yields higher. --Default rates on municipal bonds tend to be low, even without the bond-insurer guarantees, which fund managers say is part of their allure. Standard & Poor's says municipal debt carrying a triple-B rating -- three rungs down from the top -- has a long-term default rate of about 0.32% of outstanding bonds. That is lower even than the 0.6% default rate on triple-A-rated corporate bonds.