Explore Monex
February 20, 2009

Will wealth held in bonds seek gold as a safe haven to diversify?


''Auction-Rate Bonds Claiming Victims Year After Market Collapse

Mike Stelzer expected to retire after selling his cattle ranch outside Bakersfield, California. Instead, the 73-year-old is raising Holsteins on leased land, unable to quit because a chunk of his $2 million nest egg is stuck in auction-rate securities paying next to nothing.

‘I have lost all faith in bankers and Wall Street,’ said Stelzer, who invested the proceeds from the sale of his ranch in the securities through San Francisco-based Wells Fargo & Co.

A year after collapsing, the one-time $330 billion market for debt with rates typically set every 7, 28 or 35 days is still claiming victims. Investors are stuck with as much as $176 billion of the securities even after regulators forced banks to buy back more than $50 billion of auction-rate debt that was marketed as safe, cash-like instruments.

The market’s meltdown, the result of the seizure in credit markets, initially left investors with bonds they couldn’t sell, though the securities paid interest at rates as high as 20 percent. Now, rates on securities auctioned every seven days pay an average 1.36 percent, according to an index from the Securities Industry and Financial Markets Association, after central banks slashed borrowing costs.''

Investors are stuck because interest on auction-rate securities is lower than what issuers would have to pay on new borrowings, giving them little incentive to refinance.

Bank Settlements

Other options for investors are hoping that an auction succeeds or selling their securities at a loss on the secondary market. Of the 825 auctions reported last week, 81 percent failed, according to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access web site.

Stelzer is earning an annual interest rate of less than 1 percent on $675,000 in so-called auction-rate preferred securities issued by New York-based money manager BlackRock Inc. He sold $675,000 of his holdings in October at a loss of $103,000 and got all his money back on $650,000 of debt that was refinanced by the borrower.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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