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Muni Bonds Lose Buyers As Credit Crisis Spreads


MUNI BONDS LOSE ALLURE AS CREDIT CRISIS SPREADS
By CNBC.com with Reuters

Reuters
| 15 Feb 2008 | 11:01 AM ET


The credit crisis is spreading from Wall Street to Main Street.
Investors are starting to shun municipal bonds, the debt securities that states and cities issue to fund everything from sewer projects to new schools. Though muni bonds have long been considered among the safest investments, few are buying them because of worries about the safety of bond insurers that back the bonds.

On Tuesday, two muni auctions failed to find buyers, and experts said that was the first time this had ever happened. Conditions have only worsened since then, they explained.

As a result, states, counties, cities and towns around the nation now are being forced to pay sharply higher short-term interest rates, in some cases as much as 15 percent.

Investors, meanwhile, are flocking to U.S. Treasurys, which are backed by the U.S. government.

"In the financial system ... we are just getting hit from all sides here," said T.J. Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York. "That is adding to the positive tone for Treasurys."

The regulator for U.S. municipal bonds may soon intervene to force greater transparency in a more than $300 billion corner of the market that investors have shied away from in recent weeks.

The Municipal Securities Rulemaking Board is considering asking banks that package so-called auction-rate securities to share more information about that troubled part of the market, Lynnette Hotchkiss, executive director of the Alexandria, Va.-based group, said Friday.


Hotchkiss said the board could make the request sometime within the next month, with the goal being "to increase transparency in that market."

Credit market turmoil that started last summer with rising defaults among risky mortgage loans has spread to auction-rate securities, in part because the bond insurers that back them face downgrades by credit rating agencies.

The bonds underlying the securities -- a popular way for companies, municipalities and pension plans to store cash -- are generally speaking not considered to be at risk of default.

However, periodic auctions held by large banks and other financial institutions to determine the interest rate for these securities recently have found few -- if any -- buyers. As a result, interest rates on some of these securities have shot up, raising concerns among lawmakers and regulators about the potential impact on the cost of financing public works projects and student loans.

Banc of America Securities estimates that 80 percent of auctions held Wednesday failed.

Auditors are taking a close look at the issue, and experts expect them to pressure companies to write-down the value of their investments if they cannot be sold. Accounting and consulting firm Deloitte & Touche LLP last month issued an alert saying that the auction-rate securities "warrant scrutiny" due to credit market turmoil.

Rates for auction-rate paper are reset periodically, and an auction fails when no buyer can be found and the dealer does not take it back.


Tax-free issuers have sold a total of $250 billion of muni auction-rate debt and many are now reviewing whether to switch to a different kind of floating rate debt, such as variable rate demand obligations, which can be more liquid. They also are considering fixing their interest rates instead of using floating rate paper.

One muni issuer whose Tuesday auction failed was the Maryland State and Health and Higher Educational Facilities Authority, the conduit for Anne Arundal Health debt due in 2029, added one source, who provided the CUSIPs for the debt.

The other was California Statewide Communities Development Authority auction-rate for Children's Hospital Series B that matures in 2032, said the source.

Copyright 2008 Reuters. Click for restrictions.

URL: http://www.cnbc.com/id/23183400/

2/15/2008 11:24:02 AM Troubled bank Citigroup Inc. (C) could be facing more problems in its hedge funds, the Wall Street Journal reported Friday. The company has reportedly closed off one of its hedge funds to investors, preventing them from withdrawing their money. The Journal also reported that a new leveraged fund lost over half its value in the first three months of existence.

News of the hedge fund troubles came following a report that Citi, which is the largest U.S. bank, froze redemptions in CSO Partners following a move by investors to withdraw over 30 percent of some $500 million in assets for the fund. CSO Partners specializes in corporate debt. Additionally, the Journal reported that Citigroup injected some $100 million into the shaky fund after it lost nearly 11 percent of its value this year.

Adding to the turmoil, fund manager John Pickett left after a disagreement with Citi executives, the Journal said. The dispute arose after Pickett attempted to go back on a commitment in which half of the fund's assets would be used to snatch up leveraged loans associated with a German media company.

The other hedge fund facing trouble, Falcon Plus Strategies, lost 52 percent of its value in the fourth quarter of 2007 alone, the Journal reported. That makes for a difficult start for the fund, which started September 30 2007. The losses came after wagers on mortgage-backed and preferred securities went sour. The Journal added that some collateralized debt obligations in the fund trade at a quarter of what they were worth when the fund opened.

http://www.rttnews.com/apps/deskaler.../2008&item=628

Nice weekend you all...

Same to you and everyone!

I'm thinking that the Asian/Euro markets won't treat this horrible US data so benign. Remember the last 3 day weekend?

I was thinking the same thing. See the stock market rally towards the end? This is all BS.

Amen brother. I wouldn't be shocked to see this get taken care of by our international brothers. Only the NY guys apparently believe this data was great. I'm shorting any AJ, NJ, EJ or GJ rally.

I was thinking the same thing! I will however keep my TP tight for about 50-60 pips on GJ. Don't need to get that greedy.

Don't forget the CJ as well.

Everyone have a great weekend!

Everyone have a great weekend..........

HOLLA

Cramer and New York Gov. Eliot Spitzer agree: Washington’s $168 billion stimulus package does not address the economy’s underlining credit problems.

Gov. Spitzer called the plan, signed by President Bush Wednesday, “an election year waste.” It will put money in Americans’ pockets, which is good he said, but it won’t help the bond insurers at the root of this mess.

Looks like karmo was right over here about the pull back. Nice call man, I'm glad I TP on at least some trades. The bull pinbar looks scary, I'm out next monday. Have a good weekend all.

PS: cesar, how was valentines in brazil? Beach mode again?

Hi cesarnc how you doin' bro?

US Congress is off next week for their President's Day recess. When they return there is stepped-up political concern over the housing recession and mounting foreclosures.

No, actually we don't celebrate valentines in this date. It's on June 12th, which is also my birthday.

Those dates (mother's and father's day, valentines, children's) are carefully spread throughout the year so every 2 months you're spending a shitload of money in gifts.

Advance Happy Birthday cesarnc!

Advance to be recognized!

Big Wave Rider's dog goes to town

http://www.break.com/index/horny-dog...n-picachu.html

Sup bro, good to see you collecting those pips, 217 should be coming soon too (in normal market conditions)

Yeah but that was also when Soc Gen fiasco hit the DAX and FTSE index futures markets.