Muni investors, take heart: Warren Buffett’s recent sale of $8 billion in credit derivatives was simply a profitable trade—and not a comment on the overall value of the municipal bond market.
So says LPL Financial Market Strategist Anthony Valeri in “Municipal Misconceptions,” a comment published Tuesday on the renowned Berkshire Hathaway CEO’s second-quarter sale of $8 billion worth of municipal derivatives contracts. Valeri’s comment came on the heels of news that circulated late in August over Buffett’s decision to close out his large position in credit default swaps insuring municipal debt.
“We simply view the Berkshire Hathaway sale for what it is — the closing out of a profitable trade,” Valeri writes. “We believe Berkshire would have likely sold the entire position, rather than just half, if there was true concern for broad-based municipal credit quality.”
The insurance-like contracts were originally purchased by Lehman Brothers Holdings in 2007, more than a year before the firm filed for bankruptcy, according to an Aug. 21 report in The Wall Street Journal. “It isn’t clear whether Berkshire’s move will leave the company with a profit or loss on the wager,” the WSJ reported. “Mr. Buffett, Berkshire’s 81-year-old chairman and chief executive, declined to comment.”