Warren Buffett's offer to back the municipal bond portfolios of three monoline insurers has put some bounce into stocks today, and it's also waking up the credit markets.

Buffett's proposal to have his Berkshire Hathaway guarantee the $800 billion municipal bonds covered by three troubled insurers is giving a big boost of confidence to a market made anxious by the possibility those insurers could be downgraded. One of the insurers has already turned down Buffett's offer, but still the market is upbeat on the idea that the billionaire investor is willing to step up. Buffett announced his offer in a phone call to "Squawk Box" this morning.

The financial markets have worried that possible ratings downgrades of the insurers--Ambac

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[MBI  Loading...      ()   ] and FGIC--would in turn cause a ripple in the muni market, where the bonds they insure would be impacted by their weakened ratings. That conceivably would make it more expensive and difficult for municipalities to get financing and cause havoc in the secondary market.

Today, the flight-to-quality trade in place in Treasurys yesterday is reversing, and the muni bond market is seeing some action it hasn't seen in awhile.

"It's created buying interest in the muni market today," said Jon Fiebach, managing director of Duration Capital, which runs a municipal bond hedge fund. "We're seeing better bids than we've seen for quite some time. My traders are definitely on the offer side for the first time in three months. We've gotten bidders for bonds. I don't know if it's created a floor, but it's created some type of confidence. There are people buying munis right now."

Fiebach says there is nothing wrong with the underlying muni bonds, but the market has acted as if they are broken. If Buffett succeeds, "it restores the ability for municipalities to fund their short term liabilities, which is where the problems have been. The money markets have been puking back any insured paper, even the highest grade."

The fear factor in the market has resulted in some odd mispricings. "Uninsured bonds of the same credit are trading at a higher price than the state of Washington bonds that have an additional guarantee of an insurance," said Fiebach.

Shares of Ambac and MBIA were under pressure today. Traders say the two companies may balk at the Buffett plan because they basically would be saddled with their troubled CDO portfolio while Buffett rides off with the municipal bond business.

"The monolines are like hard boilded eggs. They're already cooked. It's not going to save the monolines. The reason Buffett's comment is important is because everybody thought the secondary market in munis was going to get murdered," said CNBC's Rick Santelli, who spends his time talking to traders in Chicago's futures pits.

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