Interest Rate Roundup

Friday, February 29, 2008

Muni market massacre?

Reports are circulating about a massacre in the municipal bond market. From Reuters:

"Tender option bond programs on Friday were selling "multiple billions" of dollars of U.S. municipal bonds, a money manager said, which is accelerating a market slide that experts call the worst in decades.

"Prices have dropped for the past 12 days, partly due to the problems borrowers and investors are having with short-term municipal markets.

"Two of these markets, auction rate and variable demand note obligations, have frozen because investors fear some bond insurers that backed this debt are no longer credit-worthy as a result of their bad bets on subprime mortgage investments.

"These dislocations have hurt tender option bond trusts, which buy long-term muni bonds and finance them by selling floating notes. But now they are losing money -- or are about to -- because their borrowing costs have skyrocketed.

At the same time, the value of their long-term municipal bonds has plunged."

Long bond futures have gone ballistic -- up a whopping 2 4/32 points in price at last check. 2-year note yields have plummeted 18 basis points to a cycle low of 1.63%. Meanwhile, as you can see in the chart above, yields on 30-year AAA munis are soaring -- to around 5% from a low of about 4.2% in late January.


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