Auction technicals can be misleading, says Bank of America

In its latest credit derivative research, Bank of America/Merrill Lynch says that last week's credit derivatives settlement auction for General Growth Properties subsidiary Rouse highlights the risks of trying to game the auctions.

Most recent auctions have seen deliverables priced lower than where the bonds were trading prior to the auction because there has been net open interest to sell. This reflects the cash-CDS basis trades that dealers have put on.

The report says that the market was surprised when the Rouse auction produced a smaller net open interest to sell than expected. The bonds, which had traded down to nearly 28 points in anticipation of a sell-off at the auction, were then bid up at the second stage of the auction from the inside market midpoint of 28.25 to 29.25. After the auction, the bonds immediately traded up to 31.5/33.5.