>The funds don't necessarily have to redeem the preferred, they can leave it out at the penalty rate.<
My supposition is that, if auction liquidity does not return to normal, the funds will eventually have to redeem the auction-rate securities both to maintain their reputation and to avert lawsuits from the preferred holders. As mentioned in #msg-26882357, this is a low-probability event, but the ramifications in the worst-case scenario could be severe for funds that are highly leveraged.
My objectives from holding closed-end muni funds are capital preservation and tax-free income. I take enough risks in other portions of my investment portfolio (e.g. biotech stocks) that I don’t want to incur any risks from muni holdings that are avoidable. Thus, I invest only in non-leveraged funds. Regards, Dew
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