Auction-Rate Market Shrinks By $21 Billion as Borrowers Escape

Bloomberg reports:

Municipal borrowers from Wisconsin to California plan to pull at least $21 billion of bonds out of the auction-rate market by May 1 to escape soaring costs, according to data compiled by Bloomberg.

The amount is more than what was sold in any one year before 2002, the data show. About 69 percent of auctions in a market that also includes debt of student lenders and closed-end mutual funds failed to attract enough buyers this week, resulting in interest rates as high as 14 percent. Rates are determined through a bidding process managed by banks typically every 7, 28 or 35 days.

Borrowers are converting to fixed-rate bonds and other forms of variable-rate securities, after investors pulled back from debt backed by downgraded insurers and dealers stopped acting as buyers of last resort. Yields on municipal auction debt are almost twice what they were in January on average, based on a Securities Industry and Financial Markets Association index.