Crossover Refunding

Everyone wants to take advantage of lower interest rates, and local governments issuing municipal bonds are no different. When interest rates go lower, a municipality may decide to refund its current high interest bonds before their maturity date by paying back the principal and any accrued interest. The municipality will then issue new bonds called “refunding bonds” at lower interest rates. Think of refinancing your home at a lower interest rate, where you still need to pay back the original amount you borrowed.

The proceeds from this new issue are escrowed in U.S. Treasury bonds. On the due date, these “crossover” funds are used to pay off the previously issued, high-interest bonds.