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Very interesting to see how liquidity has yet to be restored to term-auctions.

Auction-Bond Failures Deplete New Hampshire Fund 

March 17 (Bloomberg) -- The fallout from the collapse of the auction-rate bond market has infected New Hampshire, where the state college and university system was forced to tap its reserves to cover more than $1 million in extra borrowing costs.

``It hurts,'' Ken Cody, associate vice chancellor of finance for New Hampshire's state college and university system, said in a phone interview. ``We have very limited resources.''

Yields on the system's bonds rose to as high as 7.8 percent last month from 3.9 percent in January after auctions run by Wall Street firms failed, depleting funds for campus maintenance, Cody said. The system converted $84.3 million of bonds to debt with fixed payments and plans to bid at an auction of its remaining $63.6 million of securities this week to reduce rates, he said.

New Hampshire is among municipal borrowers likely to offer to buy their own securities after the U.S. Securities and Exchange Commission said March 14 that the bids wouldn't run afoul of laws against market manipulation. Lehman Brothers Holdings Inc., which managed the auctions, prevented the system from bidding last month, Cody said.

The $330 billion market for auction-rate securities imploded in February after dealers who supported it for more than two decades stopped bidding for bonds investors didn't want, pushing interest costs to as high as 20 percent. Since then, almost 70 percent of the auctions for debt sold by cities, colleges, student lenders and closed-end funds have failed each week, according to data compiled by Bloomberg.

Rising Rates

Auction-rate bonds have interest rates determined through bidding run by dealers every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and rates are set at a predetermined level set in documents when the bonds were issued. Bondholders who wanted to sell are left holding securities.

Auction rates on debt that resets every seven days were 6.41 percent as of March 12, up from an average 3.94 percent in the previous year, according to a Securities Industry and Financial Markets Association index. The average rate reached a high of 6.89 percent on Feb. 20.

Zurich-based UBS AG, Europe's biggest bank by assets, was sued on March 14 by a client for investing in auction-rate bonds. UBS marketed the securities as being ``just as good as cash,'' according to the complaint filed in Manhattan federal court. A UBS spokeswoman, Kris Kagel, said in an e-mailed statement that the bank is ``working with clients on a case-by- case basis, to restore their immediate liquidity needs.''

Paying 20 Percent

Issuers from Cleveland to Chicago's school system to Jefferson County, Alabama, which was downgraded to below investment grade as a result of the higher auction costs, face resets on their debt this week.

The Port Authority of New York and New Jersey, owner of bridges, tunnels and airports around New York City, sold $700 million of bonds March 12 to refinance auction securities after rates on its debt soared to 20 percent Feb. 12 from 4.3 percent the week before.

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    http://www.bloomberg.com/apps/news?pid=20601109&sid=aVdOfa0oB4Yo&refer=exclusive 

 

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I doubt liquidity will be restored to term auction securities for a long time.  Basically people have been using that to increase yields for short term money yet the terms are long term.  So, if you need to sell it short term you are stuck with what ever you can get.

I started looking at these things just before they froze and my thoughts were that it was nuts buying long term debt for a short hold, and highly risky.  I was truly surprise that the market had gone to just accepting this as everyday.

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