Wednesday, February 13, 2008

Auction-Bond Failures Roil Munis, Pushing Rates Up

Bloomberg reports:

Feb. 13 (Bloomberg) -- Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding won't commit their own capital to the debt.
Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque and New York state's Metropolitan Transportation Authority also experienced failures, officials said.
What began three weeks ago with too few bidders for auction-rate debt backed by relatively small entities, such as Georgetown University and Nevada Power, has widened in recent days to include large issues of state governments, such as New York state's Dormitory Authority. The auction failures provide new indication of Wall Street's unwillingness to commit capital amid $133 billion in credit losses and asset writedowns.

Recall that I exited my closed-end muni fund positions (NXZ in particular) the day after MLK day. Well, NXZ been trending up ever since and I had a great deal of self-doubt. Today it gave back 3.86% which was an enormous move for a bond fund. It's still above where I sold it but I'm beginning to think that my conservatism may be vindicated.

Despite Warren Buffet's offer to provide a back-stop to the monoline insurers, the credit crisis is far from over. First of all, it's clear that if the monolines give up their muni business they may as well sign their own death warrant. The way I see it, the muni business is the only bargaining chip they have, as in "If we go down, we take the system down with us. So how about a few billions to help us out?"

That said, I'm sure eventually most of the muni bonds will find a high quality insurer. Their yields are very attractive now. Even more so should the dividend rate cut expire in 2010. The way things are going, soon I may even have a chance to go back in for less.