20% Muni Bonds how do I buy this.

[clifp]

I found this article pretty amazing.

Feb. 13 (Bloomberg) -- Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding won't commit their own capital to the debt.
Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque and New York state's Metropolitan Transportation Authority also experienced failures, officials said.

Bloomberg.com: Worldwide

Could one of the pros like Brewer or Saluki explain what the heck is going on? More importantly how do I get my hands on some of these 20% bonds?

[twaddle]

Good thread on ARS at FatWallet:

Retail Cash Management Products FAQ

The current mess is discussed towards the end of the thread.

[al_bundy]

if you have access to the WSJ, excellent story about this today. a family with $1 billion in assets lost $286 million in these because the credit market imploded

[nepo]

Originally Posted by clifp

I found this article pretty amazing.


Bloomberg.com: Worldwide

Could one of the pros like Brewer or Saluki explain what the heck is going on? More importantly how do I get my hands on some of these 20% bonds?

If you want an explanation of auction rate securities check this:

Link

Short answers: no you can't get your hands on the "20%" bonds, whoever got stuck in the failed auction has it, but not for long.

These securities are used by cash management funds by corporations, muni money market investors, and folks like that. Auctions were rarely or ever failed. Advisors considered them as safe as cash but with a higher yield. Obviously, with this credit crunch contagion, it's clear there's no such thing as a free lunch. Derivatives are a nightmare, who said that?

[Marquette]

Originally Posted by nepo

Derivatives are a nightmare, who said that?

Mr. Market?

[MooreBonds]

My father has one of these issues (long story...full-service broker @ Bank of America talked him into it). It's a security that Ameren (formerly Union Electric) issued. Thanks to clifp's post, I mentioned this to him (unfortunately, he's not very knowledgeable when it comes to investments-and worse, he doesn't want to bother to learn).

He called his broker to find out more about it. Turns out, the Ameren securities he held had their last auction a few days ago. NO ONE placed orders to buy the securities. As a result, the security entered some kind of special interest rate of 18% on an annual basis for the life of the security (another 20 years). So apparently, Ameren will have no choice but to close out the bonds and reissue another tranche.

At least, that's what the broker told him (I sure as hell hope the rate didn't reset to 18% because they're in default....

I tried to rub it in that his broker didn't bother to call him on his own initiative to mention this to him - but it didn't seem to catch his attention.

Apparently, quite a few of these auction-rate securities are having problems these days with action demand.

[clifp]

A bit of followup. The fat wallet thread was very interesting, I didn't read all 20 pages but I read enought to understand that A. you have to be fairly lucky to get to one of these fair high interest rates since only a few percent of auctions fail. The more typical rates are 4% hardly worth the effort vs a Schwab or Vanguard MM. Secondly, there is a a non zero chance that you could get stuck with a bond that actually default in which case getting your money back is problematic at best. Now in the past the actual number of defaults on ARS is tiny, but we are entering unchartered waters.

I found no way to purchase ARS via Schwab, I could purchase them via Fidelity but I have small account and no cash with Fidelity so I have filed this under my too hard.
category.

Interestingly enough I did get a call from my favorite WSJ reporter (she quoted me in article last year about tax loss selling) who is doing a story about ARS.

Finally, I'll raise a caution flag about Closed End Funds (CEFs) and Auction Rate Securities (ARs). Last Dec, I was touting closed end funds as bargains while I was absolutely right about the discounts from NAVs narrowing once tax season was over market declines have made most of my purchases a break even. Upon investigating them I found that many CEF use ARS to increase leverage. As we all know leverage works both ways, and generally speaking ARS issued by CEFs are not the highest rated securities being auctioned. A potential ugly situation would occur if the Auction starting failing on the prefered shared issued by CEFs. I can easily see a situation where close end fund managers looking at having to pay 15-20% interest rates decide to deleverage and trigger another round of selling equities. So far I've determined that the Eaton Vance funds are largely uneffected by this.

[twaddle]

Yeah, I've been watching leveraged muni CEF's recently. I think we're going to see some killer bargains soon.

Here are the details about a failed auction for Nuveen CEF preferreds:

Auction Rate Woes Weigh On Leveraged Closed-End Funds

It doesn't sound too bad for the CEFs -- basically they have to pay 4.3% instead of sub-3% on their leverage for a while.

Unfortunately, Nuveen doesn't seem to be providing much insight into their auction results. NPT is specifically mentioned in that article, but if you look at the auction results for NPT, there's no indication of failure:

NPT - Preferred Share Daily Rates

[BTW, I can't believe you agreed to do that article on TLH. When I was asked, I said I'd rather just call the IRS directly and ask them to audit me. ]

[SecondCor521]

Originally Posted by clifp

Interestingly enough I did get a call from my favorite WSJ reporter (she quoted me in article last year about tax loss selling) who is doing a story about ARS.

How is Jane doing?

(She and I chatted last year as a potential source for that article as well, but she ended up not using my quotes.)

2Cor521