Auction-Rate Bonds Lure Investors With 20% Interest
Feb. 18 (Bloomberg) -- The U.S. market for auction-rate securities that failed to draw enough buyers last week is luring new investors as interest rates soar to as much as 20 percent, Bank of America Corp. analysts said.
Less than a quarter of auctions failed that offered interest above 10 percent, analysts led by Jeffrey Rosenberg in New York wrote. The failure rate was as high as 98 percent at auctions offering 4 percent interest.
Banks including Citigroup Inc. and Goldman Sachs Group Inc. allowed hundreds of sales in the $330 billion market for the securities to fail last week after they couldn't attract bidders and didn't step in to buy unwanted debt. An unsuccessful auction of $100 million of notes sold by the Port Authority of New York & New Jersey raised the rate to 20 percent from 4.3 percent.
``Penalty rates as high as 20 percent making for very attractive investments'' helped bring new investors to the market, Rosenberg and Hans Mikkelsen wrote in the Feb. 15 note.
Auction-rate securities are long-term bonds where the interest is reset at auctions held every seven, 28 or 35 days.
Banks stopped buying the securities for their own accounts to prevent failures after disclosing at least $146 billion of credit losses and writedowns stemming from subprime mortgages.
As banks backed away from the market, failed auctions have left holders unable to sell the securities and boosted interest costs for borrowers from cities to hospitals. An unsuccessful auction almost doubled seven-day borrowing costs on $15 million of bonds sold by Harrisburg International Airport in Pennsylvania to 14 percent.
AllianceBernstein Holding LP, the New York-based investment firm, BlackRock Inc. in New York and Boston-based Eaton Vance Corp. said last week that investors shunned debt auctions by some of their funds.
Banks' efforts to preserve their balance sheets by not buying auction-rate bonds may be an ``ineffective band-aid'' because borrowers may draw on credit lines provided by banks, the analysts for the Charlotte, North Carolina-based bank wrote.