Before February of this year, investors looking for a safe and liquid place to invest their money with better rates than traditional money-market accounts often placed them in auction-rate securities. Ever since the auction-rate market froze earlier this year, investors who need access to their cash have been faced with the agonizing dilemma of having to either wait to see if the market will recover or look for ways to get some of their money back. Some may have to take out a loan to meet cash needs.
Those who don’t need immediate access to their cash can benefit from waiting for the market to turnaround because of the higher yields. As of May 14th, 103 auctions in the SIFMA Auction-Rate 7-Day Index had an average yield of 3.61 percent. In comparison, the average 7-day annualized yield in the U.S. taxable money market was just 1.95 percent.
Another benefit for patient investors may be that the banks and brokers who underwrote the securities will rescue them by redeeming the securities. So far, Calamos Asset Management, Claymore Securities and Nuveen Investments have secured financing to redeem some customers. Bond issuers like the Southern California Public Power Authority are refinancing their debt to redeem their customers.
However, investors who need their cash fast to pay bills like tuition or mortgage face a rude reality. They will either have to take out a brokerage loan and pay the interest on that loan or allow their broker to buy the securities for a discounted price.
Many investors who wanted safe and liquid investments are saying that the risks of auction-rate securities were never made clear by their brokers. Faced with doubts of the market’s ability to recover and the frustration of having to sell their securities at a discount, some investors are filing arbitration claims against the brokerage firms as their last chance to find a way out of this mess.
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