Auction Market Shrinks by $51 Billion, With Failure Rate at 71%

April 11 (Bloomberg) -- The auction-rate securities marketis shrinking by at least 15 percent, or $51 billion, as U.S.municipal borrowers refinance to escape higher costs and closed-end funds begin to bail out investors. States, cities, hospitals and colleges from Denver toWashington, D.C., have converted or are planning to replace atleast $43.1 billion of the debt, according to data compiled byBloomberg. Nuveen Investments Inc. and seven other fund managerssaid they will redeem $7.8 billion in taxable preferred sharesthat have rates set through periodic dealer-run auctions. ``On the municipal side, things are starting to unclog,''said Judy Wesalo Temel, director of credit research at Samson Capital Advisors LLC, a fixed-income manager in New York. The Bond Buyer 20-Bond Index, a weekly gauge of long-termmunicipal yields, fell 29 basis points, the most in at least 18years, to 4.61 percent yesterday. That's the lowest since Feb.14, the week the auction market collapsed. A basis point is 0.01percentage point. An index of rates on debt with auctions held every sevendays fell 1.05 percentage points to 5.67 percent on April 2, aneight-week low, according to the latest available data from theSecurities Industry and Financial Markets Association. About 71 percent of weekly or monthly auctions, includingthose of student lenders, were unsuccessful this week, about thesame as last week, Bloomberg data show. Dealers, who typically stepped in with their own capital to prevent failures when thereweren't enough bidders, pulled back their support in February. Auction-rate bonds had allowed issuers to achieve money-market-like costs on borrowings of 20 years or longer by havinginvestors bid regularly to change the rates and giving them theoption, though not the right, to move in and out of the debt.