dolmar said:Fidelity has an 28 day issue reseting for 5.43% while I understand it is only A2/A rated I dont think it going to default or anything any time soon. This ARS has $25K min.

A rate of 5.43% = an APY of 5.61% which is well above most savings account and even VRDN too.Dolmar, I am resurrecting this post from January in the hopes of getting your perspective on non-AAA rated issues today.

I read your comments in the MMF thread relating to ratings of some securities not accounting for noperforming (or evaporating) assets. I think this was in the context of funds that hold CDOs and suspect mortgage slices.

Many of the highest paying resets at Fidelity have less than AAA ratings:

CFS 2003-B B2 5.600 -- A2 A
CLC 2006 B-1 5.750 -- A2 A
CLC 2003-1B-2 5.800 -- A2 A
HEF 2004-1 B-2 144A 5.350 -- A2 A
CLC 2005-1B 5.850 -- A2 A

Do you think the worrisome ratings you discussed elsewhere are limited to mortgage securities? Would you have any concerns buying a Sallie Mae or Higher Education Fund reset rated A2/A at the present time?

I would not worry that much about thoses 3 issuers as all 3 are govement sponseder agencies either by the federal or state goverments.

Personally I would not touch Sallie Mae with a 10 foot pole as the deal closed today and they are now a private company that is leverage to the gill and no longer rated AAA but only BBB.

Also I would not be a hero either on these issues. If any of there credit ratings get lowered sell at the next auction period and ask questions afterwards. You can always buy back the position later.

I personally have lots of AA and A position VRDN/Discount Notes/Commerical Paper and Repo and I am not worried 1 bit but I also dont have anything related to home mortgages or issued by mortgage lenders, packagers, resalers etc , brokerage houses or hegefunds either. I also stated in this thread that I would not recommend buying PARS as they are issued against funds and not not direct obligations of anyone except the close end fund, hedgefund etc.

1 more thing the fact I dont mind holding AA/A does not mean all AA/A paper is good or bad. Just so you know besides Federal Goverment, Goverment Agencies and Munis there are only 8 other AAA rated companies in the world. Anything above BBB is investment grade anything above A2 is considered very low risk chance of default.

The reason many CDO and MBS are having problem is not because the default rate is that high but because they funds that own them are super leverage. So if you have 10X leverage on the fund and a 5% default rate because of the leverage that is really like having about 50% default rate.

Thanks again. Snagged one today at 5.5 (entered 5.4 and estimated rate was 5.35). Not as good as the rates you guys got earlier but still better than FSLXX.

Wow that issue that showing 5.8% this morning settled at a rate of 6% which is an APY of 6.15%. Wow that is paying a higher rate than any of the stuff I currently am buying from Citigroup.

lhendricks92 said:just got for first interest payment on one of the 7 day resets i bought last week. the payment was correct based on the past week's rate.

the rate jumped to 5.95% yesterday. wow, i guess investors are demanding higher rates for any bond that's not a treasury - even if the bond is rated AAA. seems a bit irrational, but i'll take it.

You know what is funny yesterday all of Citigroup ARS/VRDN/Repo Loans reset lower and I mean much lower but Citigroup clients for the most part are institutional clients my VRDN reset between 5.42-5.51% yesterday down from 5.68-5.83% that ARS I had reset down from 5.81% to 5.41% and my Repo loans reset down from 5.71-5.93% to 5.49-5.58%. I am looking on Citigroup web page highest paying ARS they have now shows only a rate of 5.46%. VRDN/Repo loans which are institutional cash management products are tied to LIBOR which fell over the last week from 5.61% to 5.21%. The way reset is determined is based on a spread over or under LIBOR based on the demand. My understanding is if demand and supply are even the rate paid is straight LIBOR and based on demand the spread is +/- LIBOR.

I assume Fidelity has mostly retail clients who are scared to invest in any bonds which is why rates continue to be paying a huge spread over LIBOR because retail clients do not buy based on LIBOR or fundimentals. So I am assuming Fidelity is having a harder time clearing there ARS as there demand must have fallen off a cliff for them.

Over the last year or so when I noticed Fidelity start to list there ARS on there web page in general institutional cash management products used to pay a premium over ARS and Citigroup and Fidelity ARS keep resetting normally between 2-5 basis points part. Some weeks Citigroup was higher other weeks Fidelity were higher but there was not 40-50 basis point spread between them.

lhendricks92 said:dolmar said:I assume Fidelity has mostly retail clients who are scared to invest in any bonds which is why rates continue to be paying a huge spread over LIBOR because retail clients do not buy based on LIBOR or fundimentals. So I am assuming Fidelity is having a harder time clearing there ARS as there demand must have fallen off a cliff for them.

So, I'm assuming the big spread we're enjoying with our Fidelity resets is not a cause for concern?

Why would you be worried? Remember rates on ARS is set by a dutch auction. If demand for the auction is stronger rates reset lower if demand is weaker then the rate will reset higher. Which is why you can have a AAA issue reset with a higher rate than a AA issue. Look at tax-free bonds. Resets for high population/high state income tax rates tend to pay a lower rate because there is more demand for them than say from low population states simply because there are more bidders for thoses auctions.

Like I said I think most of Fidelity clients are retail clients(I could be totally wrong just my personal guess and if someone knows for sure please fell free to correct me) which tend to invest based on emotions and not fundimentals vs Citigroup clients tend to be institutional investors(Again I could be wrong just my personal guess based on my own personal experiances with Citigroup and the fact many of the brokers refuse to sell cash management products and again if someone knows otherwise please fell free to correct me) which invest and base there bids based on fundementals. Which is why I dont think Citigroup saw there bids fall off a cliff as most institutional investor understand Muni/Goverment Agency issued/backed securities are really no risk nor has there risk of default changed over the last couple of weeks.

Wow, great thread!

Thank you very much dolmar for starting this thread, and others who contributed to the thread. Now I can squeeze out another possibly another 20 - 30bps from my cash in auto pilot mode

One question - I see that the munis are insured. Does this mean I am insured for my capital and interest in case the issuer default? Of course this insurance is only as good as the financial condition of the insurer. Thanks!

dolmar said: Why would you be worried? Remember rates on ARS is set by a dutch auction. If demand for the auction is stronger rates reset lower if demand is weaker then the rate will reset higher. Thank you for your continued insight and ongoing FAQ on these investment instruments!

The trend with commercial paper is evaporation of value as there are no buyers. Lack of demand in the reset auctions is good (for investors, not issuers...) in that rates are higher. But what if demand goes too low? Do you have any concern that a reset you hold and would like to sell will not have a buyer? What would happen in the case of Fidelity if I give the sell signal to the bond trader after 28 days and nobody wants to buy my particular reset?

NorCalSci said:The trend with commercial paper is evaporation of value as there are no buyers. Lack of demand in the reset auctions is good (for investors, not issuers...) in that rates are higher. But what if demand goes too low? Do you have any concern that a reset you hold and would like to sell will not have a buyer? What would happen in the case of Fidelity if I give the sell signal to the bond trader after 28 days and nobody wants to buy my particular reset?

I am sure Fidelity would provide liquidity for there own ARS as I am sure they do not want to have a failed auction. It would be bad for underwriter, the issuer and holders of any ARS. ARS have a punitive interest of between 10-18% in the event of a failed auction. I am sure the issuers do not want to pay that rate nor does Fidelity want to loose there revunue from underwriting and administering the auctions either as all ARS are callable at any time and most issuers who would see a failed auction would more than likely imidiately pull there issue from 1 firm and go to another firm just for that reason. Once Fidelity had a failed auction I am sure it would hit the media and it might make more ARS have failed auction and ballon into a bigger problem just out of fear from the media reports. Fidelity is much better off providing liquidity and collecting a fair coupon instead of creating a panic.

With that being said in 20 years or so that ARS have been around there has never been a failed auction recorded. So I assume most underwriters just provide liquidity buy it and keep it in there own inventory till it is sold.

I know Citigroup does provide liquidity fror there own issues as I have asked my broker point blank and he told yes which is why you can buy ARS from Citigroup between auctions.Citigroup Web Page on ARS They disclose the fact they provide liquidity for there ARS which can affect the outcome of the results. I assume Fidelity does the same just dont see a discloser like I do on Citigroup web page on Fidelity saying the same thing.

Galun000 said:Is it possible for the ARS to trade below the coupon rate of the underlying muni? Theoretically it seems like it would only happen if demand is way higher than the amount available for auction.

There is no underlying coupon for ARS. You must be thinking of PARS(ARPS) which are Prefered Auction Rate securties which are issued against closed ended mutual funds, Hedge Funds and Private Equity pools which I strongly recommend not buying because of just this reason.

What a closed ended mutual fund will do is leverage up the fund and sell Pars against the fund because in general long bond rates tend to be higher than short term rates except for the last 3 years or so. So by leveraging the fund they are able to pick up the difference between what the PARS coupon is paying vs underlying issues are paying thus increase the returns for shareholders of the mutual fund, hedge fund or Private Equity firm.

That is the reason I only recommend buying ARS which are direct obligations of the issuers and may carry insurance vs buying PaRS which is debt from closed end mutual funds or hedge funds or Private Equity companies.