Municipals-Over-Bonds Spread - MOB
It sounds like something you'd hear while watching a British sports broadcast. Or, alternatively, "MOB Spread" would make a pretty good name for a '90s rap group. The 1994 summer tour featuring A Tribe Called Quest and MOB Spread!
Municipal bonds are debt instruments issued by local governments. They are used to fund things like public pools and fire houses and Harvest Day parades. The muni market has an advantage over other types of bonds, in that the federal government tax-exempts income generated from muni bonds.
Meanwhile, Treasury bonds are another special category in the bond market. They represent debt instruments issued by the U.S. federal government.
Treasuries get used to fund bombers and Medicare and Fourth of July fireworks. They don't have a tax incentive built in, but treasuries are considered among the world's safest investments. Investors generally feel the chance that the U.S. government will default on its debts as a pretty remote possibility. That makes Treasuries the place to hide when other markets get scary.
The municipals-over-bond spread takes advantage of these special categories to provide some information about market attitudes toward taxes. (Government bonds are taxable; munis are not.) To determine the spread, you take the yields from municipal bonds and compare them to the yields on Treasury bonds with the same maturity. You are comparing a tax-exempt yield with the safest yield (and therefore, likely the lowest yield you'll get in the bond market).
The MOB spread also provides some information about how the market perceives callable and non-callable bonds at a given time.
Muni bonds are callable, meaning that, under certain conditions, the local government that issued the bonds can buy them back from the holders. They can call them in, as it were.
Treasury bonds don't have that option. Once you buy one, the federal government can't buy it back. You have it until maturity, unless you sell it to third party. Thus, investors can use the MOB spread as a way to track (and attempt to profit from) changes in market responses to interest rates, with the different tax status and callable options playing a role in the differing yields on similar maturities of muni bonds and Treasuries.