Municipal reset bonds auction failure
Just read this off Fatwallet Finance: it appears that there were some municipal reset auction failures over the past two weeks. Here’s the first article:
A tortuously slow and painful credit ratings shakeout in the beleaguered bond insurance industry has helped cause the failure of US municipal bond auctions, the first known instance of this since 1991.
Over the last two weeks, at least six auctions of tax-exempt auction-rate securities, one of them by Georgetown University in Washington DC, and all insured against default, failed to draw sufficient investor interest in these sales designed to open up cheaper financing for local governments.
Here’s another article, from Reuters, referencing the same event:
NEW YORK, Jan 30 (Reuters) – Washington, D.C.’s Georgetown University and a Nevada utility on Wednesday confirmed that a couple of their auction-rate municipal bonds had failed at auction, which experts said was believed to be the first time that this had ever happened.
A failure typically means that the bonds will continue to earn a certain minimum yield but because there are insufficient buyers, you cannot cash them out. This is OK if you do not need the money but bad if you happen to need liquid cash.
The article mentions that this “was believed to be the first time that this had ever happened”. I would like to quote Larry Swedroe — “Do not confuse the unlikely with the impossible”. It appears that what we have now is a highly unlikely event happening.
My previous discussion on municipal reset bonds : [LINK].
Stumble it!
