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Auction Rate Securities, the Muni Rally and Smith Barney's Best Day Ever

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The crisis in the auction rate securities market continued this week. While some issuers are preparing to refinance auction rate securities that have the highest interest rates, the suddenly turbulent market for muni bonds may leave many investors stuck in their illiquid positions.
"About 61 percent of auctions failed to attract enough bidders yesterday, in line with the average since mid-February, according Bloomberg.
The recent rally in the muni market, however, may make it easier for ARS issuers to refinance the products. Many auction rate securities are issued by government agencies. In order to repurchase the securities from investors, these agencies would likely have to issue plain-vanilla municipal bonds.
Accrued Interest has a good discussion of the breathtaking rally.
"On Monday, retail buyers (i.e., mom and pop investors) started coming out of the woodwork to buy bonds," he writes. "The State of California came with a $1.7 billion deal on Monday. Demand was so strong that the underwriter cut the interest rate by 15bps across the board, and still $1 billion of the deal was done retail. Now maybe there has been $1 billion of a deal done retail in the past, but I sure as hell don't remember ever hearing of such a thing. Smith Barney, Citigroup's retail brokerage arm, supposedly had the best day for selling municipal bonds in their entire history on Monday. One large dealer I talk to regularly said they had sold every bond in their inventory by 11AM."
Munis Rally as Highest Yields Since 2004 Lure Buyers [Bloomberg]
Municipal Bonds: Yeeeeaaaaahooooooo! [Accrued Interest]