``Negative yields came as a surprise to me when I started uncovering them,'' says Kevin Olson, an ex-bond trader and founder of the Web site MunicipalBonds.com, which every day lists the widest price disparities in the transaction reports. ``This comes from someone who has learned not to be shocked by anything in the municipal market.''

Olson has been giving bond dealers fits since 2001, when he began releasing his daily survey of municipal bond prices, which illustrates a market where amateurs should fear to tread.

In 2002, he filed a lawsuit against nine dealers for charging what he said were excessive markups on municipal bonds. He later withdrew the suit.

Now he's back. This time, it's negative yields.

On his Web site, Olson now has this headline, ``Negative Yields Discovered.'' The text reads, ``Municipalbonds.com has uncovered negative yields in the secondary Muni Markets. This doesn't appear to be random or one-time-only infractions. We have discovered thousands of cases.''

This section of the Web site went live today. On it, Olson lists negative yields for every day this month, and provides his surveys for 2000, 2001 and 2002. On the page, he asks, ``Aren't negative yields illegal... or prohibited... or something???''

Daily List

Olson says he has found enough negative yields to compile a list of them every day, and has gone back into the MSRB data to see what happened in 2001 and 2002.

For 2001, he said he found 779 transactions that produced negative yields. For 2002, he put the number of negative yields at 1,681 out of 644,216 bonds traded.

Consider, for example, some Maple Run at Austin Municipal Utility District, Texas, revenue bonds. The bonds were sold in 1992 with a coupon of 6.50 percent, and mature in 2009. On May 22, two bonds ($10,000 face value) were sold to a customer at a price of 102.50.

The yield to maturity is just over 6 percent, which is almost impossible to find in the tax-exempt bond market today. The next par call on these bonds -- in other words, the date when the issuer can demand these bonds back (which is not to say that the issuer definitely will demand them back), in return for 100 cents on the dollar -- is June 27.

That's June 27 of this year. The price of 102.50 produces a yield to the par call of -29.433 percent.

Try Again

That's pretty interesting, I thought. Let's try another. Here's an Armstrong County, Pennsylvania, hospital authority revenue bond, with a 6.25 percent coupon due in 2013, sold in 1992 for the St. Francis Medical Center project.

Five bonds (face value: $25,000) were sold to a customer on May 22 at a price of 102.05. These bonds are callable at a price of 101 on June 18. The price of 102.05 produces a yield to the call of -9.067 percent. The yield to maturity is 5.975 percent.

Or let's take some Intermountain Power Agency, Utah, bonds, sold back in 1995, and carrying a 5 percent coupon. The bonds are escrowed to maturity, and yet the call provisions, as we have seen on some so-called escrowed to maturity bonds, ``may be exercised,'' according to the bond description.

There is a par call on June 27. Some of the bonds were sold to a customer on May 21 at a price of 102. The price of 102 produces a yield to maturity of 4.79 percent. It produces a yield to the par call of -23.999 percent.

Place Your Bets

What's going on here?

As ever in the municipal bond market, it's tough to say, because we don't know who's buying what. Either this is grotesque, or it's not. Either investors know what they're buying, or they don't.

``Did a trader offer bonds and a broker mark them up without checking or even considering the yield math?'' asks Olson. ``Did a trader and/or a trader and broker both see a negative yield to call but think it worth the risk? Did the customer know and accept that risk? Is the muni market a place for yield-to-call crapshoots?''

I find it hard to believe that some broker, somewhere, buys bonds as they approach their first or optional call date (and so trade at prices very close to par), then marks them up and sells them to Mom and Pop in the hope that they may not be called in three weeks or a month. What would he say, then? Oops? Sorry?

More likely, some investors look at these bonds and decide that the risk of a call is one he or she is willing to take. Just because an issuer can exercise a call doesn't mean it will.

An Explanation

``Bond investors are getting creative in order to boost short- term yields,'' explained John Hanley, national sales manager at George K. Baum & Co. in Denver.

``One approach is to invest in `soft cushions' or premium bonds that price to shorter optional calls,'' says Hanley. ``Investors are making a bet that bonds will make it past the call date. If that happens, incremental yields may pick up significantly. The approach requires some research but can generate decent returns. To this point it's been a safe bet as negative arbitrage has slowed municipal refundings.''

That has to be the explanation, doesn't it? Place your bets. If you win, you get more tax-exempt yield than is available in the new-issue market right now. If you lose, well, you get most of your money back.

That has to be it. It couldn't be that some dealers are taking advantage of most investors' lack of knowledge about how the municipal market works, and exposing them to unnecessary risk, could it?