Municipal Bond Market Crash
When there aren't enough buyers, the bond auction fails and bondholders who wanted to sell are left holding the securities.
A wave of bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers in recent days.
Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt...
and on reluctance by dealers to submit bids and risk ending up with too many of the bonds.
The failures in a market where local borrowers have more than $300 billion of debt outstanding follow unsuccessful auctions of student loan-backed bonds last week.
Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they arrange to convert the bonds to some other form of debt.
Alex Roever, JPMorgan Chase fixed income analyst: "This market has been under a tremendous amount of stress.
Without the dealers providing an active secondary bid, it's very hard for these transactions to clear."
Matt Fabian, senior analyst with Municipal Market Advisors:
"It's the beginning of the end for the auction-rate market. Banks have stopped supporting the market."
Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, soared to 20% yesterday from 4.3% a week ago.
The 20% rate for the $100 million of Port Authority auction bonds will cost it $388,889 until the next weekly auction, up from $83,611 last week.
Hattip to Bloomberg
A wave of bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers in recent days.
Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt...
and on reluctance by dealers to submit bids and risk ending up with too many of the bonds.
The failures in a market where local borrowers have more than $300 billion of debt outstanding follow unsuccessful auctions of student loan-backed bonds last week.
Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they arrange to convert the bonds to some other form of debt.
Alex Roever, JPMorgan Chase fixed income analyst: "This market has been under a tremendous amount of stress.
Without the dealers providing an active secondary bid, it's very hard for these transactions to clear."
Matt Fabian, senior analyst with Municipal Market Advisors:
"It's the beginning of the end for the auction-rate market. Banks have stopped supporting the market."
Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, soared to 20% yesterday from 4.3% a week ago.
The 20% rate for the $100 million of Port Authority auction bonds will cost it $388,889 until the next weekly auction, up from $83,611 last week.
Hattip to Bloomberg
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