NEW YORK 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
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.
"Tender option bond selling is in the multiple billions,"
said Gary Pollack, a managing director at Deutsche Bank Private
Wealth Management. Tender option bond programs are created by
both hedge funds and dealers, and they typically are highly
leveraged, which intensifies their influence on the market.
Dealers have been struggling to cope with the flood of
supplies from these trusts because they must save their cash.
Banks and dealers have turned into cash-hoarders because
they face billion-dollar write-downs from the sinking subprime
sector and need to dress up their balance sheets because they
are so close to end of the financial quarter.
And municipal bond issuers, from states to cities to
agencies, are abandoning short-term muni markets and
transforming these issues into long-term debt. This source of
new supply -- expected to hit soon -- also is hurting prices.
(Reporting by Joan Gralla; Editing by Andrea Ricci)