by dionysus on 2010/05/06
Bill Gross, the head investment officer of bond giant PIMCO and the most famous fixed-income investor in the world, dismissed Moody’s and S&P as deeply flawed arbiters of investment risk. In his monthly letter he said “Such services, however, while necessary in the ongoing scheme of financial regulation, are overpriced as well as subject to the influence of the issuer, which in turn muddles their minds and clouds their judgment to say the least.”
His beliefs have nothing to do with the outcome of investigations of the two firms.
Gross makes the obvious point that his firm is large enough to do its own research, making the ratings firms’ work irrelevant to him, but he believes that they offer “second grade” intelligence to their clients.
Gross’ examination of the two ratings agencies goes well beyond the debacle of the mortgage-backed securities mess. Both companies gave derivatives that turned out to be junk “AAA” ratings. Congressional investigations and suits by state attorneys general claim that rich fees and shoddy research helped cause the credit crisis.
As Gross looks at Moody’s and S & P, his current concern is their ratings of sovereign debt. Spain, he reasons, does not deserve a high rating largely because of its 20% unemployment rate. There were rumors this week that the IMF was working with Spain on a 280 billion euro bailout which would be twice the size of the one prepared by the Eurozone for Greece.
The effectiveness of the rating system as they release their opinions on the weakest European nations will only face a real test when the deep trouble in the region is largely past or when it has erupted into one of the great financial disasters of recent years. If the road leads to disaster, Moody’s and S&P will be accused of being too optimistic about their ratings of Spain, Portugal, and Italy. The two firms will almost certainly say that they could not reasonably see the risk of “contagion.” That is likely true, and lower ratings could actually be the cause of a liquidity crisis in the region.
S&P and Moody’s are not in business to prevent contagion, no matter how convenient it is to take that point of view. Nonetheless, their credit ratings of the weak European nations are almost certainly much too high.
Tagged as:
Bonds,
Fixed-Income
by dionysus on 2010/04/12
I’d like to introduce someone who is almost an “old friend” in a way. David Rosenberg, formerly North American economist at Merrill Lynch, and now Chief Economist & Strategist at Gluskin Sheff. Publisher of a macroeconomic and market briefing, regular readers know how much I’ve valued (and quoted) his insights and straight-shooting style over the years. To get your own copy of David Rosenberg’s daily musings, jump over and subscribe.
Today’s “Breakfast with Dave: Market and Data Musings” has a great overview of the arguments on either side of the great Treasury bull-bear debate. Rosie juxtaposes the perspectives of two of the most respect yields strategists currently: MS’ Jim Caron, and Goldman’s Jan Hatzius. A dose of Jim Grant is also thrown in for good measure. Must read summary for bond bulls and bears alike.
You really have to have a read of “Yield Views Couldn’t Differ More” on page B1 of the weekend WSJ. It pits Jim Caron, a good pal and former Merrill rates-strategist colleague against Goldman Sach’s Jan Hatzius, a former formidable competitor and I would argue runs one of the best, if not the best, economics houses on Wall Street. Jim is bond bearish, Jan is bond bullish. The world pretty well knows my view. The article talked more about supply than it did about inflation, which is the much more critical ingredient in any simulation of interest rate determination.
Jim Caron makes the claim that the US government has never before been raising so much debt to finance the bloated fiscal deficit and roll over existing obligations. But if truth be told, the US government never before paid down as much debt as it did previously back in that surplus year of 1999 and the Treasury market got hammered.
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Tagged as:
Bonds,
David_Rosenberg
by dionysus on 2010/03/22
Most corporate bond trading currently occurs in an over-the-counter market. At first sight, the reasons for this may seem obvious. Bonds generally are traded far less frequently than stocks. Absent an active market, an exchange listing may not be cost-effective. In addition, the complexity and sheer variety of available bond issues can be daunting, making them less suited for retail investors. Recently, there have been attempts to establish electronic exchange-based trading platforms which provide execution services and are targeted to retail investors.
Last month, the London Stock Exchange launched an electronic retail bond-trading platform. The LSE, citing “strong private investor demand,” established the new exchange-based trading service to capture – some might even say create – a retail investor market for fixed-income securities.
The LSE’s goals are modest. It hopes that the new exchange will encourage issuers to target the retail audience specifically, by offering retail-friendly bonds in smaller lot sizes. The LSE is not alone in its belief that retail investors have an appetite to participate more fully in the bond market. Christine Lagarde, the French foreign minister, is leading the charge with more ambitious plans. France hopes to foster a bond-trading exchange platform based in Paris that will trade not only in French companies, but all types of Euro-bonds.
Anticipating pan-European retail trading, the Deutsche Börse has also entered the ring. Its recent attempt to create a commission-free bond trading market on its Xetra electronic platform stalled shortly after launch, however, when a court in January imposed a preliminary injunction against the venture. Apparently, the selection process of specialist brokers (a key feature of the platform’s continuous auction model) whacked the exchange. Stay tuned on this one, I’d say.
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Tagged as:
Bonds,
exchange_platforms
