NEW YORK, Jan 24 (Reuters) - Bond insurer troubles continued on Thursday to push up rates on insured variable-rate obligations of U.S. cities and towns, with some trading as high as 6 percent, an industry analyst said.
Money market funds and other investors that hold variable-rate municipal bonds are putting some of those securities back to dealers because of uncertainty associated with wobbly bond insurers, said Michael Downing, short-term muni account manager at Municipal Market Data in Boston.
"We are just seeing a really wide market. Anything from low 2s to high 6s and nobody has seen anything quite like this," he said.
Municipal Market Data, a unit of Thomson Financial, compiles average yields on variable-rate demand obligations sold by states, cities and towns to finance infrastructure programs or other capital needs.
Its data shows that insured floating-rate paper with daily rate resets is trading at yields that on average are 70 basis points higher than yields on securities that do not have guarantees from insurers.
The average yield on daily general market variable rate bonds was 3.24 percent on Thursday, but when all insured securities are excluded, the yield was only 2.54 percent. These rates refer to bonds that are not subject to the alternative minimum tax.
MMD on Wednesday started publishing the average yield on bonds without insurance in response to inquiries from market participants who want to determine valuations on securities untainted by bond insurers.
Bond insurers are wobbly after having guaranteed principal and interest payments on a series of repackaged subprime mortgage loans and other debt. Expected losses from those guarantees are surging, forcing the insurers to raise more capital to stem potential rating downgrades.
mbac Financial's (ABK.N: Quote, Profile,Research) insurer became first to lose one of its top ratings when Fitch Ratings downgraded it two notches to "AA" from "AAA" last Friday after the market closed early for a holiday.
The rate on daily muni floaters spiked to 3.23 percent when the market reopened on Tuesday, from 3.03 percent on Friday before the downgrade.
Fitch on Thursday cut the "AAA" rating of another insurer XL Capital Assurance Inc, part of Security Capital Assurance (SCA.N: Quote, Profile, Research). XLCA's rating was cut five notches to "A."
Downing did not say how XLCA insured paper traded on Thursday.
Analysts have said that money market funds can only hold paper that is rated "AA" or higher, so XLCA's downgrade could cause some additional selling, though that insurer's market share is relatively small.
To avoid adding this paper to their inventories, dealers have been offering higher yields to investors. This, in turn, means higher borrowing costs for U.S. cities and towns. (Reporting by Anastasija Johnson; Editing by Dan Grebler)
