In the aftermath of the Boston bombing, the Treasury market went into its predictable flight-to-quality mode, with municipals underperforming as a result. The primary calendar, consisting primarily of large, liquid issues, was absorbed with relative ease and tax-exempts closed out the Wednesday trading session with a firmer tone.

After months of fretting about the potential inflationary impact of the Fed’s Quantitative Easing efforts, investors apparently threw in the towel this week.

Bloomberg reports that mutual funds that invest in Treasury Inflation-Protected Securities (TIPS) have seen outflows of $2.8 billion in the first quarter of this year, their longest period of withdrawal since 2008. Exchange-traded funds (ETFs) dedicated to TIPS have also seen outflows so far this year. This has led to a selloff in five-year TIPS, just as the Treasury gets ready to auction another $18 billion today.

Of course, the bigger story on inflation (or absence thereof) is the dramatic crash in gold prices which started late last week and accelerated this week: the precious metal was down 13% just over two trading days. Certainly, the gold rout was initially triggered by technical concerns, such as the fear that Cyprus would have to sell a large portion of its gold reserves as part of its bailout package. However, one has to wonder if investors were just waiting for an excuse to unload their gold holdings, now that fears of an inflationary spike no longer seem justified. In truth, the massive monetary easing efforts from central banks around the world have so far failed to boost economic growth to any sort of level that would re-ignite inflation.

With some luck, fixed-income investors may not have to face the bear for a while.

If nothing else, the anecdotal evidence coming out of Europe would point toward a deepening recession: new car registrations in the European Union fell for the 18th month in a row in March, down 10.2% to 1.3 million units.

Thus, while the U.S. economy seems to have gained some modest traction according to the most recent Fed Beige Book, continuing weakness overseas, along with geopolitical concerns such as North Korea, should serve to keep the Fed engaged for quite a while longer. This, in our view, should further delay the inevitable rise in interest rates from current historic lows. With some luck, fixed-income investors may not have to face the bear for a while.

Helping the Individual Investor

For those of you who may have missed it, the Securities and Exchange Commission (SEC) hosted a Roundtable on Fixed-Income on Tuesday 4/16 (we watched a live webcast of it just so you don’t have to, as these proceedings tend to be long and dreary affairs). Although both the corporate and municipal bond markets were on the agenda, it was obvious the Commission was the least comfortable with its grasp of how things work in the tax-exempt sector. The largely white male panelists discussed ways to improve trading and price transparency for retail investors (Interestingly, no actual retail investor was represented).

Most of the proposed solutions consist of throwing more data and more disclosure the retail investor’s way. For instance, one of the panelists proposed aggregating all the bid-wanted information stored on the various electronic platforms and making it available to the MSRB for dissemination to individual investor. However, how many retail buyers would have the prior training to understand such bid-wanted information? We know of many so-called “professionals” who don’t.

Whether or not pension obligations to CalPERS can be reduced through bankruptcy will be a topic of great interest to other fiscally-strapped cities and towns looking for a way out.

What the individual investor needs, we believe, is not more raw data, but more data in easily digestible form that would allow them to make an informed decision. Just consider what’s currently available on EMMA: there is already a great deal of useful data posted there but much of it is not very user-friendly. This has already given rise to a whole new cottage industry: vendors who offer technological solutions designed to filter and restructure the data into actionable trading information.

Pricing/evaluation issues and the future role of electronic trading platforms were among the other important topics raised by the panelists. We’ll be sure to discuss those in future articles.

The Real Lesson from Stockton

The national financial media has a way of reducing fairly complex issues to overly simplistic statements. Nowhere is that more true than in their recent treatment of the Stockton bankruptcy. This morning, a Bloomberg article trumpeted the fact that many institutional investors are shunning G.O. debt in favor of water and sewer debt, presumably as a result of the Stockton bankruptcy. There’s only one problem with that assessment: Stockton does not have any G.O. debt outstanding, and neither does San Bernardino, the other famous fiscal derelict from the Golden State.

To us, the real lesson from the Stockton bankruptcy, one which is still unfolding, is how the California Public Employees’ Retirement System (CalPERS) will be treated in bankruptcy court, as there appears to be a conflict between bankruptcy law, federal law and state law with regard to CalPERS’ standing in Chapter 9. Whether or not pension obligations to CalPERS can be reduced through bankruptcy will be a topic of great interest to other fiscally-strapped cities and towns looking for a way out.


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