There is repricing of risk going on all over the place. Repricing risk is going to lead to higer rates.
The rate on $100 million of (weekly) bonds soared to 20%. While some of it may be due to market overreaction, we are probably going to see an increase in interest rates despite what the fed does.
We have seen student loan auction fail. It's going to be interesting to see if this is temporary or not. If it's not temporary, it's going to have profound effect on local government projects to business spending.
If we get the same issues with Home Mortgages, look out below!
Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt, and on reluctance by dealers to submit bids and risk ending up with too many of the bonds. The failures in a market where local borrowers have more than $300 billion of debt outstanding follow unsuccessful auctions of student loan-backed bonds last week.``It's the beginning of the end for the auction-rate market,'' said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. ``Banks have stopped supporting the market.''
Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they arrange to convert the bonds to some other form of debt. Bankers and borrowers have been working on conversion plans for several weeks.
``We have seen widening spreads, reduced demand for certain auction-rate securities and failed auctions, including some auctions in which Citi acted as broker dealer,'' Danielle Romero-Apsilos, a spokeswoman at New York-based Citigroup, said in a statement.Unsuccessful auctions have hurt companies that bought those variable-rate securities as short-term investments with excess cash, and are unable to sell their holdings. Bristol-Myers Squibb Co., the New York-based maker of the anti-clotting pill Plavix, announced on Jan. 31 a $275 million writedown of its auction-rate holdings related to subprime debt, which totaled $811 million at the end of 2007.About a third of 449 companies polled in a survey last May for the Association for Finance Professionals said they had investments in auction-rate bonds.
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