The Wall Street Journal-20080216--Auction-Rate- Freeze Thaws a Little- High-Altitude Yields On Safe Issuers- Debt Lure Bargain Hunters

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'Auction-Rate' Freeze Thaws a Little; High-Altitude Yields On Safe Issuers' Debt Lure Bargain Hunters

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One crisis-plagued corner of the credit markets shows glimmers of healing a little.

As more conservative investors shun "auction-rate" securities -- debt from municipalities and other issuers with rates that reset on a frequent basis -- some hedge funds and other sophisticated investors are nibbling, seeking bargains and opportunities amid the market's difficulties.

The allure: Debt from some relatively safe issuers has been carrying super-high yields, tempting investors to take a chance. "Everyone is looking at the market; it makes a tremendous amount of sense buying" AA-rated debt that sometimes is yielding about 20%, says Steve Tananbaum, chief executive officer and chief investment officer of GoldenTree Asset Management, a New York firm that invests in junk bonds, distressed debt, bank loans and other debt and equity products.

One example, New Jersey Sports & Exposition Authority, had securities in the market Thursday with an annualized yield of 20.5%, according to some bidders. The city of Reno, Nev., had such securities in the market yielding 15%, they said. The Port Authority of New York and New Jersey, had securities in the market that topped 20%, but fell late in the week as demand materialized. The trade lured so many new bidders that most of the fattest yields in the 20% range had fallen to 8% to 10% by Friday, but for some they were still compelling.

"We are confident that some investors find these securities more attractive now that they are yielding more than they were when the auctions were clearing," Merrill Lynch & Co. told clients in a report Friday. "However, those investors must be able to tolerate the lack of liquidity and term uncertainty that comes with failed auctions."

Brokers say they're also getting inquiries from some individuals looking to buy debt. Auction-rate securities are long-term bonds that behave like short-term debt. Their interest rates are reset in auctions conducted by banks frequently, from daily to every 35 days. The securities -- often tax-exempt -- are issued by municipalities, museums, student-loan providers and others who like the auction-rate mechanism, because it gives them long-term debt that in normal times pays typically low short-term interest rates.

Investors who buy these securities are often corporate treasurers and wealthy or "high net worth" individuals who want cash-like investments that they can buy and sell frequently. The securities change hands in regularly scheduled auctions, when the interest rates are also reset. Hedge funds have usually steered clear, because the returns can be skimpy, just a bit above benchmark short-term yields. Moreover, many hedge funds often run offshore units that don't pay high taxes, and wouldn't benefit from the tax-free status of many of these investments.

Traditional issuers have fled the market, because many of these securities are insured by troubled bond insurers, and out of generalized fear about complex investments. That has led to undersubscribed auctions, pushed up yields and also created some opportunities, because many of the issuers in this market are in relatively stronger financial condition. By some estimates, failed auctions reached $60 billion in the past week, though hard numbers weren't available. Despite the signs of demand, the failures continued into the week's end.

While some new investors are moving in, the municipalities, nonprofit organizations and other groups that issue this debt are looking for alternatives to these now expensive sources of financing. Issuers "in a panic mode" will "look to their muni-investment bankers" for refinancing options, said a Morgan Stanley report issued Thursday. "Unfortunately, this will not be a quick process. . . . In the meantime, institutional investors and particularly treasury departments in major corporations will look to sell these bonds given the auction failures."

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Robin Sidel and Randall Smith contributed to this article.

FGIC's Plan to Split

Gets Cautious Support

FGIC Corp.'s plan to split itself in two got a cautious thumbs up from municipal-bond-market participants, who see in the plan an attempt to regain the coveted triple-A ranking so vital to the bond- insurance business.

FGIC, which is 42%-owned by PMI Group, last year insured $45 billion of state and local government bonds, a little more than 10% of the year's volume, said data provider Thomson Financial. The company, caught up in soured investments in mortgage-related securities, has lost its triple-A rating from all three major credit-ratings firms.

FGIC-insured municipal bonds showed no price movement in response to the plan in a basically unchanged municipal-bond market Friday. "There's enough uncertainty surrounding the plan that people haven't responded," said Evan Rourke, a municipal portfolio manager at M.D. Sass & Co. in New York.

-- Stan Rosenberg

Ten-Year Treasurys Climb

Longer-dated Treasury notes ended Friday's shortened session in positive territory, but two-year notes got tripped up as investors booked profits after recent steep gains. The benchmark 10-year note advanced $3.125 for every $1,000 invested, for a yield of 3.780%, down from 3.818% Thursday. The two-year note ended down 31.25 cents to yield 1.908%. Treasury trading will be closed Monday for the Presidents Day holiday.