SEC: Keeping the Bond Market Churning

To beat the potential stand-still in bond offerings, the SEC opted to temporarily allow bonds sales to proceed without providing credit ratings in Official Statements, which are deal documents distributed to brokers, and investors that provide full disclosure of issuers' financials - particularly, balance sheet, cash flow, total debt outstanding, credit rating, use of funds and debt service.
It appears that the SEC is intent on keeping the flow of deals moving to help financial “supply chain” generate money including, investment banks, issuers of debt, lawyers and financial advisors. Perhaps their mindset is that this will trickle down to impact the economy as a whole. And so it goes....the SEC is bending the rules to indirectly help keep the Economy moving in the right direction, by way of the Bond sales.

On the heels of the securitized mortgage and subprime housing debacle, the last thing we need are credit raters that are gun shy about rating bond offerings. Okay, let's break this down.... credit rating agencies, are in fear of rating?. You're thinking, "Isn’t that like a Chef being afraid of cooking?" Nevertheless, this comes as an unintended backlash from the Financial Reform Bill. It was reported in the Wall Street Journal that raters’ want to avoid exposure to liability, therefore the top three rating agencies; Moody, S&P and Fitch, won’t allow their ratings to be included in the public disclosure documents (Official Statement) that would normally accompany bond sales. To be clear, they will continue to rate bonds, but apparently do not want their rating to be the basis of any investors’ decision to purchase the bonds - thereby eliminating liability in the event of default.

Well I know many of us market watchers, analyst and economists were all prepared for backlash from the tightened regulations handed down by lawmakers. As the smoke clears, and the dust settles on the Reform Bill, more and more instances of backlash will emerge. Capital Hill will be compelled to press the “reset” button, and then it’s back to the drawing board with revisions and addendums until they get it right.

K. Reilly
Cohn-Reilly Report

___________Comments

John T. said......
I am very very concerned that the bond market is the next bubble. We have basically been in a 25+ year bond bull market, and rates are darn close to zero. Every scared person out there is jumping at bonds and bond fund managers are holding their noses and scooping up everything they can......with the exception of Bill Gross who knows this is coming and is probably already clearing out his offices.......

As soon as we get a couple of good jobs numbers and confirmation that yes, we are in recovery.......and the Fed says "ok, let's raise 1/4 pt".....it's over....and everyone who has bond funds is going to watch the NAV deteriorate, perhaps for many years to come. And those who bought long term bonds for yield will find the prices will erode and they will be forced to hold to maturity........and maybe even watch a 1 year 5% CD float by as they can't do a darn thing about it.

I feel bad for the elderly. They're going to get hit from this when it comes.

Katherine said...
You make a very good point John T. It seems that investors now have the responsibility (self preservation)to project into the future and decipher whether or not the worst case scenario is something they can bare. In today's market there is no such thing as a secure investment. Bonds were always a good bet for long term, but there are so may unusual factors playing into the market that it's next to impossible to anticipate. Veteran analysts and fund managers may have the benefit of experience to navigate through these times, but what about the fund managers who have only 3-5 years experience.