The net asset value on your municipal bond funds fell one percent last week. What gives?

You thought they should have gone up, right? Didn't interest rates decline?

Blame it on the subprime meltdown. Blame it on the hedge funds. As Max von Sydow said in the movie, "Needful Things" (1993), "Blame it on me? Blame it on the bossa nova!"

The net asset value is the dollar value of a share in your mutual fund, and is calculated every day. Your fund's NAV fell because prices on the municipal bonds it holds declined. That happened because prices on all municipal bonds fell.

Why? Prices fell on municipal bonds because hedge funds and some mutual funds had to raise money. To do that, they sold some of the best assets they had, and those included muni bonds. When everyone is buying, prices go up. When everyone sells (or even announces that they want to, by putting out big "bid-wanted" lists of bonds), prices go down.

That's the simple answer to the question of why NAVs on so many tax-exempt mutual funds went down. There's really no credit-related reason behind the decline. There are lots of things to be concerned about in the days to come. Most analysts say they all add up to a big buying opportunity in municipals now.

"An important buying opportunity has emerged in the municipal bond market," wrote George Friedlander, municipal strategist at Citigroup Inc. In the firm's "Municipal Market Comment" letter, Friedlander observed, "We encourage individual investors to put cash to work and lengthen maturity substantially."

At Merrill Lynch, strategist Philip Fischer wrote: "High grade muni credits are now trading at between 95 and 100 percent of Treasuries on the long end of the curve. Unlike other product where relative value may be extremely difficult to identify, here it is quite clear that for virtually any taxpayer, the municipal market offers a windfall after-tax gain."

In other words, you can now buy municipals that give you the same yields as Treasury securities, and the tax-exemption, which usually adds up to a full point in yield or more, is free. Municipal bonds, normally the most reticent of investments, are screaming: Buy me. For those interested in tax-exempt income and preservation of capital, of course municipal bonds are always alluring.

Fueling the sell-off in municipals last week, according to the strategists, were some hedge funds deciding to get out of the tender-option bond business.

This had become a pretty easy way to make money in the municipal market over the last several years.

Banks and institutional investors, such as hedge funds, would borrow money to buy big blocks of bonds and put them into a trust. This was used as collateral for new floating-rate instruments the sponsors of the plans then sold to investors.

The sponsors took advantage of the difference between short and long-term yields. This has been shrinking for some time, to about one-half of a percentage point this July from 2.67 percentage points in 2003.

Merrill estimates that $180 billion, or about seven percent of the market, has been packaged this way.

What happened? The flight to quality in the Treasury market made it too expensive for some sponsors to finance and hedge their holdings. On July 26, one money manager told Bloomberg that the boom in putting together the tender-option bond plans caused some concern: "You have to wonder how many more people can jump in this pool before driving the economics out of it."

Are more tender-option bond program managers going to get out of the business? "We do expect that the muni market will follow the trend of other markets and employ somewhat less leverage," Merrill's Fischer wrote.

So that's a concern.

There are other things to worry about in Muniland — the US Supreme Court this fall will hear a case about state taxation of out-of-state municipal bonds. If the court rules against the status quo, states will have to decide to tax all municipal bonds, including their own, or none. That has the potential to shake things up.

Then there's the new-issue supply picture. States and municipalities are on a pace to break the $408 billion annual issuance record set in 2005. Some refinancing transactions might be shelved, but municipal issuers tend to sell bonds when they need the money.

Finally, there's the government's investigation into "anti-competitive practices" in the municipal market. That's almost entirely devoted to the process of public finance. It could tarnish the reputation of muni bonds. I can't see it having much of an impact on prices or credit quality. Or on those NAVs.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)