Bond Auctions Are Failing
CreditClutch

 

 From 2% to 87%

 
The Failure Rate Is Up From 2% To 87% Within Just Days February 16 -- Eighty-seven percent of auction-rate security auctions failed on February 14. Liquidity continues to deteriorate in today's $330 billion market. This information was reported by Bank of America.
The BAC report said that the failure rate has grown from 2% on February 7, and 6% on February11.
The report further stated: "This latest episode in the credit crunch reflects liquidity risk rather than credit risk, as unlike last summer, the underlying credits affected remain generally stable".
This week there were over 200 auctions of municipal auction-rate securities. The auction rate security failures portray the constrained conditions of financial institutions' balance sheets, according to BAC.
The BAC report concluded, "Perversely, however, with roughly half of the $330 billion ARS market typically held by corporate treasurers, that $165 billion may well end up right back on bank balance sheets as treasurers look to access revolving lines of credit to meet working capital requirements that can now no longer be met with their formerly cash equivalents".
UPDATE:  February 18 -- The US market for auction-rate securities is gaining buyers through increased rates. Rates have risen to as high as 20%.
Specific review by analyst Jeffrey Rosenberg shows that under a quarter of auctions failed when offering interest above 10%. In contrast, the failure rate was up to 98% in auctions which 4% interest.
Auction-rate securities are long-term bonds carrying interest that is reset at auctions held every 7, 28 or 35 days. Recently financial institutions stopped supporting the market after disclosing minimally a total of $146 billion of credit losses and write downs stemming from subprime mortgages.
Banks' efforts to preserve their balance sheets by not buying auction-rate bonds may be a short-term ineffective method because borrowers may draw on credit lines available at those banks.