The London Interbank Offered Rate, a floating-rate index used by many municipal market participants, jumped dramatically last week amid claims the banks reporting the rate were artificially providing low numbers. For muni market participants, exposure to the elevated rate has wide-ranging implications.

Libor plays a behind-the-scenes role for a host of securities and transactions: as a benchmark index for setting minimum and maximum rates in auction-rate security auctions, in swaps that pay a variable rate based on Libor, and as part of hedging strategies that make bets on the correlation between the municipal curve and the Libor curve. For more typical municipal bonds, the changes in Libor will have little effect.

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