Muni bonds flee auction-rate securities

Municipal borrowers plan to pull at least $21 billion of bonds out of auction rate securities by May 1 as part of an effort to escape soaring costs, according a Bloomberg report. The amount is more than what was sold in any year before 2002, according to data compiled by Bloomberg. About 69% of auctions in a market that also includes debt of student lenders and closed-end mutual funds failed to attract enough buyers this week, resulting in interest rates as high as 14%, according to the report. Rates are determined through a bidding process managed by banks typically every 7, 28 and 35 days. The average rate on long-term bonds with rates determined at auctions every seven days was 6.41% as of March 12, based on public data from the Securities Industry and Financial Management Association. That rate is down from a record 6.89% in February, but is still higher than every other reading in the two-year-old index that averaged 3.6% through January of this year, the report stated. The use of auction bonds by states, cities and other municipal borrowers grew in 2002, when sales doubled to $25 billion from $12 billion the previous year, according to data compiled by Thomson Financial. Sales peaked at $42 billion in 2004 before falling to $39 billion in 2007.