Auction Bond Failures Near 70%; No Sign of Abating

Bloomberg reports:

Auction-rate bond failures show no sign of abating after investors abandoned the market for variable-rate municipal securities.

Almost 70 percent of the periodic auctions in the $330 billion market failed this week as investment banks stopped buying the securities investors didn't want. Yields on the debt averaged 6.52 percent as of Feb. 28, up from 3.63 percent before demand evaporated in January.

States from New York to California and lawmakers including House Financial Services Committee Chairman Barney Frank are attempting to revive the market. Rising yields are pinching state and local governments just as a slowing economy and falling property values slash tax revenue by more than $6.6 billion, according to a report by the U.S. Conference of Mayors.

``Even if the auction-rate market survives, we're not going to see the kind of rates we're used to,'' said Roger Roux, chief financial officer at Rady Children's Hospital in San Diego, which spent an additional $940,000 on its auction bonds since rates reset as high as 15 percent last month.

There were 521 failed auctions in the market for the floating-rate securities yesterday, amounting to a rate of 66 percent, according to data compiled by Bloomberg from brokers at Wilmington Trust Corp., Bank of New York Mellon Corp., Deutsche Bank AG and Wells Fargo & Co. The rate of failures reached 87 percent on Feb. 14 and has since ranged from 61 percent to 69 percent, according to Bank of America Corp.

An article well worth reading.