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Today Federal regulators voted to approve a rule that has the potential to change Wall Street. The so-called Volcker Rule, a centerpiece of the Dodd-Frank financial overhaul law and a symbol of the Obama administration’s efforts to rein in risk-taking of the big five banks after the financial crisis, received approval from all five regulatory agencies.
But how will the new ruling affect the bond market, given there are already concerns that new capital rules along with the Volcker rule which prohibits proprietary trading are sapping liquidity from the wider bond market, and that the negative effects have been masked by the Federal Reserve’s unprecedented bond purchases under quantitative easing.
The Volcker rule outlaws proprietary trading by the banks, but does allow them to continue buying stocks and bonds for their clients — a process known as market-making – and to place trades that are meant to hedge their risks.
While that is more red-tape than banks have to deal with at present it is less than the severe restrictions on market-making activities some on Wall Street had feared.
The rules also allow banks to do proprietary trades in bonds issued by governments. United States banks can make bets with Treasury securities and even municipal bonds. In a significant concession, the Volcker Rule allows the foreign affiliates of United States banks to trade in bonds issued by foreign governments.
All in all the new rules are much less severe than most big banks had feared, so there should be little to no effect in the way bonds are traded. If banks are to be believed, a far greater risk to the bond market are the new capital requirements implemented after the financial crisis, which some have blamed for decreased liquidity.
The new rules are set to go into effect on April 1st, 2014 and compliance should be in place at banks by the summer of 2015.
Todays Other Top Stories
Napa Net: – Failure to disclose pension liabilities makes muni bonds risky. – While it’s interesting to read about the pension crises of many well-known states and municipalities, including Detroit, Illinois, Chicago and Stockton, and how they might affect current and former workers, it’s important to understand that the results of unfunded pensions may harm investors. Muni bonds seem safe because the issuer is a political entity, but, according to an article by New York Times columnist Gretchen Morgenson, disclosure rules and oversight may be less stringent than with other investments, making muni bonds more risky.
About.com: – Municipal Bonds 2014 Outlook. – The bond market performed poorly in 2013, but there were still plenty of places investors could have made money: High yield bonds, senior loans, and short-term bonds, to name three. The outlook again points to a year of continued volatility and muted gains in 2014, but this time municipal bonds may well be the asset class that stands out from the pack.
Wall Street Pit: – Puerto Rico bonds “scoop and toss”: When increasing yield is not a good thing. – Most investors clamor for investments that generate a high yield, particularly when they have been pitched as safe and secure municipal bonds.
ETF Trends: – Detroit bankruptcy casts shadow over muni bond ETFs. – Last week, a judge declared bankrupt Detroit is eligible for protection from creditors, potentially leaving municipal bond holders in a lurch. However, muni exchange traded fund investors have another option available.
Bond Buyer: – N.J. Bond counsel Jack Kraft picks the right fights. – Every bond counsel attorney in New Jersey probably owes a debt of gratitude to John L. “Jack” Kraft. Kraft, of the firm John L. Kraft, Esq., LLC, has been bond counsel attorney for more than 45 years. During that time, he played a key role in establishing the bond counsel business in New Jersey, along with handling some of the state’s most significant bond deals.
Bloomberg: – California bond rally faltering amid frugality doubts. – A rally that drove California’s relative borrowing costs to a five-year low is faltering as investors speculate lawmakers will squander budget surpluses with the state entering an election year.
Focus On Funds: – Munis face challenges in ‘choppy’ 2014 – Barclays. – After a lousy 2013 for muni bonds, Barclays sees better times ahead next year – perhaps. From Barclays muni strategists Thomas Weyl, Sarah Xue and Ming Zhang.
Wealth Management: – Playing the muni downtrend. – Was the downturn in municipal bonds overblown? Many portfolio managers are betting that munis will rebound. Here’s how to play it.
Forbes: – A silver lining in Detroit’s bankruptcy. – Most pundits interpret a recent court ruling in Detroit’s bankruptcy case as a win for municipal bond investors and a loss for municipal employees and retirees. That is a fair judgment in the short term. The longer-term ramifications of the ruling, however, could be positive for both camps.
Peer to Peer Lending
Learn Bonds: – How to start investing in consumer loans – Building your portfolio. – Consumer loans offer investors the opportunity to own notes (that are paid based on the cash flow from the underlying loan) with interest rates ranging from 6.03 to 26.06 percent. The process of investing in notes is very different from buying stocks or mutual funds. This article takes an in-depth look at the investment process with Lending Club, the leading marketplace for consumer credit. When investing in notes, there are some important concepts to keep in mind.
See It Market: – 10 year Treasury note: Yield analysis and correlations into 2014. – The jittery bond market has been on edge for the last seven months as rising interest rates have put a lid on nearly every sector except floating rate notes and high yield. The threat of the Federal Reserve putting an end to its latest round of quantitative easing has pushed the 10 Year Treasury Note yield back above 2.8%. It’s yield is once again drifting towards the high of 3.0% that we witnessed back in September.
Bloomberg: – Treasury yield curve narrowest since September amid Fed wagers. – The gap between yields on 10- and 30-year Treasuries reached the narrowest level in more than 10 weeks on speculation inflation will remain in check as the Federal Reserve begins to slow bond purchases.
DoctorRX: – Several reasons to turn bullish on Treasuries: Are they good enough to make them a buy? – After a promising beginning to 2013, the Treasury bond complex (which includes notes of 1-10 years and longer-term bonds) has suffered serious harm. Given historically extreme rates on the low end of the spectrum, this bear market could well mark the start of a secular bear and thus these and other bonds perhaps should be shunned. This article evaluates the bullish side of the case and suggests a strategy that investors may want to consider.
Zero Hedge: – As credit bubble grows, junk bond underwriting fees drop to record low. – Record sales of high-yield payment-in-kind bonds are triggering uneasiness among international regulators concerned that investors may suffer losses when central banks tighten monetary policy.
ETF Trends: – Junk bond ETFs rise, defaults decline in November. – There are two primary risk elements involved with bond investing – rate risk and credit risk. Interest rate risk came into focus in the second quarter amid increased speculation about when the Federal Reserve could begin tapering its quantitative easing program.
BusinessWeek: – Sprint pays up to lead deluge of junk bonds. – Sprint Corp. is paying above-market interest rates on new notes to become the leading issuer of U.S. junk bonds this year as it seeks to fund an expansion of the country’s third-largest wireless network.
Artemis: – ILS fund managers expect no cat bond impact from windstorm Xaver. – Two insurance-linked securities (ILS) investment management firms have provided updates stating that they do not expect any impact to catastrophe bonds from last week European windstorm Xaver.
Citywire: – JPM’s Stealey removes EM local currency as downside risk grows. – Citywire A-rated Iain Stealey JPM has removed all the local currency bonds from his $1.7 billion JPM Global Strategic Bond fund after a strong short term run.
Financial Post: – Bond ETFs bring more diversity to fixed income strategies. – When interest rates start to rise, bonds tend to fall out of favour with investors, especially those holding a large portion of low-yield assets in their portfolios. While diversification is often effective in managing market changes, this approach has been a challenge when working with individual bond holdings.
Citywire: – Investec’s Eerdmans: Taper delay was to ‘teach market a lesson’. – Investec co-head of Emerging Market Fixed Income Peter Eerdmans believes markets are overpricing the risk of an interest rate rise in emerging economies next year and that the US Federal Reserve was ‘teaching the market a lesson’ when it decided not to taper three months ago.
Zacks: – Zacks #1 ranked government bond mutual funds. – Mutual funds investing in debt securities are among the most secure investment options which provide regular income while protecting capital invested. Funds which are part of this category bring a great deal of stability to portfolio which a large proportion of equity, while providing dividends more frequently than individual bonds. U.S government bonds funds usually invest in Treasury bills, notes and securities issued by government agencies. They are considered to be the safest in the bond fund category and are ideal options for the risk-averse investor.
24/7 Wall Street: – 2014 Outlook: Junk bonds and munis survive despite rising interest rates. – It is almost year-end, and investors have to be planning for 2014 and beyond for their portfolio, their assets and their taxes. Merrill Lynch expects the great rotation trade it touted for 2013 to continue into 2014, with the end game becoming more evident as rates rise. What is interesting is that the team at Merrill Lynch sees municipal bonds and junk bonds (high-yield) surviving in 2014, despite a likely rise in interest rates.
CNBC: – Smart money taper plays: Muni bonds & REITs. – Investment strategies ahead of the Fed’s pullback on quantitative easing. Twitchell explains why he see opportunities in municipal bonds and mortgage REITs.
FITCH RATES ILLINOIS' $350MM GO BONDS 'A-'; OUTLOOK NEGATIVE — pension reform didn't move this rating #muniland.
— Cate Long (@cate_long) December 10, 2013