This is clearly bad news for municipal issuers: investors wanting to buy the muni market on dips will now have a more liquid alternative to buying actual bonds, and can buy Citi’s synthetic instrument instead. Already the rise of muni ETFs has exacerbated volatility in the market. Expect the muni market to become more financially sophisticated in coming months, with a corresponding uptick in volatility. This is going to be a very bumpy ride for anybody issuing general-obligation bonds, even if there isn’t any signifiant default risk. Just because you’ll pay the money back, doesn’t mean you can borrow the money.

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Felix Salmon is an Audit contributor. He's also the finance blogger for Reuters; this post can also be found at Reuters.com.