The Wall Street Journal-20080125-Tax-Exempt Bonds Retreat On New Insurer Downgrade
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Tax-Exempt Bonds Retreat On New Insurer Downgrade
Additional downgrades of bond insurers by Fitch Ratings helped spur further risk-aversion in the $2.6-trillion U.S. tax-exempt bond market.
Fitch cut Security Capital Assurance Ltd.'s long-term issuer rating to triple-B from double-A and that of its XL Capital Assurance Inc. unit to single-A from triple-A.
Investors also were disappointed by remarks by New York State Insurance Superintendent Eric Dinallo, who on Wednesday met with bankers to discuss ways to boost insurers' capital.
In past years, insurers such as Ambac Financial Group Inc. and MBIA Inc. wrote default insurance on more than half of all munis. Ambac has insured some $257 billion. SCA is much smaller, insuring some $59 billion of munis. By buying such protection, an issuer with a lower underlying rating can get a triple-A rating on bonds it is selling and issue them at a somewhat lower yield.
But insurers also expanded into structured securities, such as collateralized debt obligations, which were battered by subprime- mortgage contagion. The resulting strain on insurers' capital levels led credit-ratings firms to threaten downgrades, in turn raising the possibility that insured bonds would face lower ratings.
Fitch on Friday cut Ambac's rating to single-A from triple-A. That sparked selling of short-term, Ambac-insured notes by tax-exempt money-market funds, which feared that falling valuations might make it necessary to inject capital into the funds to avoid net asset values falling below $1, investors said.
As selling continued this week, yields of some insured notes surged as high as 6%, double their recent level. The jump prompted officials at Thomson Financial to revise the way it computes averages of rates used by dealers to value securities.
Selling spread yesterday to longer insured maturities, lifting 30- year yields by as much as 0.09 to 0.10 percentage point.
But some investors aren't rushing to sell. One reason is that most insured bonds carry investment-grade underlying ratings, making default risk scant.
Treasury Bonds Sell Off
Treasury bonds sold off across the board, as global stocks recovered from hefty losses and concern over recession risks waned. The benchmark 10-year note was down 1 27/32 point, or $18.4375 per $1,000 face value, to push up the yield to 3.642%. Yields had already jumped late Wednesday as bond prices fell on hopes for a bailout of the troubled bond insurers.
-- Ming Zen
AUCTION RESULTS
Here are the results of the Treasury auction of 20-year inflation-indexed
bonds. All bids are awarded at a single price at the market-clearing yield.
Rates are determined by the difference between that price and the face value.
Applications ...................................... $14,300,685,000
Accepted bids ..................................... $8,000,003,000
Bids at market-clearing yield accepted ............ 23.09%
Accepted noncompetitively ......................... $37,505,000
" foreign noncompetitively ........................ $0
Auction price (rate) .............................. 99.351033 (1.807%)
Interest rate ..................................... 1.75%
Cusip number ...................................... 912810PV4
The bills are dated Jan. 15, 2008, and mature Jan. 15, 2028. The issue
date is Jan. 31, 2008. Bills, Notes Set to Be Sold
The Treasury plans to raise $23.43 billion in new cash next week with the sale of bills and longer-term notes:
-- $44 billion of 13-week and 26-week bills Monday to raise $7 billion new cash and redeem $37 billion in maturing bills. Bills are dated Jan. 31 and mature May 1 and July 31, respectively. Cusip numbers: 912795E23 and 912795F71.
Noncompetitive tenders for the bills, available in minimum denominations of $1,000, must be received by 11 a.m. EST Monday, and competitive tenders by 11:30 a.m.
-- $24 billion in two-year notes and $14 billion in five-year notes. The sale will refund $21.57 billion in maturing bills and raise $16.43 billion new cash.
The notes will be dated Jan. 31 and will mature Jan. 31, 2010, and Jan. 31, 2013, respectively. Cusip numbers are 912828HP8 and 912828HQ6.
Noncompetitive tenders for the two-year notes, available in minimum denominations of $1,000, must be received by noon Monday, and competitive tenders by 1 p.m. For the five-year notes, the deadline details are the same except for Tuesday.
