Auction Rate Collapse Brings Bondholders 12% After-Tax Return

Bloomberg reports:

The collapse of the $330 billion auction-rate debt market, a disaster for issuers and stranded bondholders, has made it possible for investors to earn 10 percent or more on top-rated securities.

Puerto Rico's tax-free AAA 2024 general obligation bonds are paying 12 percent, equivalent to an 18.5 percent yield on taxable issues. That compares with rates of 4.3 percent for 10-year U.S. Treasuries and 10.5 percent for corporate high- yield, high-risk debt, according to indexes compiled by Merrill Lynch & Co.

Investors began abandoning the auction-rate market in February on concerns that companies insuring the bonds wouldn't meet their obligations in cases of default. Municipalities, hospitals and universities have been unable to raise money, while some holders are stuck with bonds they no longer want. Still, 29 percent of auctions were successful last month as investors locked in yields they couldn't get for other assets.

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