Thursday, February 28, 2008

auction rate securities

has all the good news on bond insurers improved the auction-rate municipal-bond market? looking at results of jpm's auctions reveals that the ars market is indeed thawing a bit. jpm held 103 bond auctions on tuesday, 47 of which failed.

digging a little deeper, however, and we see that all the failed auctions occurred where the bond had a relatively low "max rate," which is when an auction fails, there is some predetermined rate at which the bond resets.

for example, some very strong credits failed on tuesday, such as some new york dorm authority bonds with fsa insurance and a aa underlying rating. this is ridiculous! the failure had nothing to do with the credit, but for the fact that the "max rate" was only 4.688%. holders of these bonds not only have zero liquidity, but an unexciting reset rate to boot.

among the successful auctions, rates ranged from 4% to 10.24%, with a median rate of 6.755%. while these rate resets will not grab headlines like the 20%-type rates seen over the last couple weeks, 6.75% is still about 450bps higher than where money-market-eligible munis are trading.

so while it might be said that the ars market is starting to function on a certain level, there should be little doubt about its future. muni issuers are highly likely to refinance these securities over the next three to six months, either into traditional put-bond structures or long-term fixed-rate bonds. there may not be such a thing as an auction-rate municipal market this time next year.

it's worth noting that this doesn't seem to have anything to do with the improved picture for mbi and abk, as the difference between failed and successful auctions seems to have everything to do with the available rate. in other words, it reads like there is capital available for non-liquid municipals as long as the rate is right - insurance doesn't seem to matter.

long mbi

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