Thursday, February 14, 2008

Auction-rate securities fail to attract bidders

This was an interesting story this week. Here are some excerpts from Bloomberg.

"Auctions of bonds sold by cities, hospitals and student loan agencies are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks seek to avoid tying up their capital. More than 129 auctions failed yesterday, said Anne Kritzmire, a managing director for closed-end funds at Nuveen Investments in Chicago"

and further on

"Bank of America Corp. estimated in a report that 80 percent of all auctions were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction bonds that are scheduled for bidding daily, said Alex Roever, a JPMorgan Chase & Co. fixed income analyst. "

The flip side to this story is that where there is less demand & more supply , buyers of auction rate securities get paid handsomely.

With the turmoil in the municipal bond markets, munis generally could now represent a very attractive fixed income investment opportunity for insurance companies and pension funds.

Municipal bonds are pretty safe. Interestingly the article mentions ... "auctions have failed for frequent and well-known borrowers, such as Port Authority of New York and New Jersey and New York state's Metropolitan Transportation Authority. "

It is not just the fact that financial guarantors are under stress that is causing distress here, as investment banks such as UBS suffer with their own capital writedowns and liquidity issues, they are unable to participate in these auctions & purchase those auction-rate securities that don't sell. Who knows, could be another opportunity for Warren seems to be highly prized these days.

Warren Buffett recently alluded to the fact that Berkshire Hathaway (BRKA/B) were buying up insured municipal bonds suffering from the "financial guarantor" stigma. Here's what Warren said on the CNBC interview yesterday...

"We've actually bought, or, we see bonds trading that are insured that are selling at lower prices than their uninsured counterparts, just because there's been an unusual supply and demand situation. "

Here's the full article from Bloomberg...

Disclosure: I own shares in Berkshire Hathaway (BRKB)

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