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New Nuggets from the Credit Markets



March 10, 2012 – Comments (0)

Just a few news items and thoughts from this week.

Beware of Greeks Bearing Bonds

The long-running Greek bond tragedy lowered the curtain on one of the acts.  Enough bond holders accepted the terms of the debt swap to let it go through, but not without Greece invoking collective-action clauses forcing most holdouts to accept the deal.

Bond holders get new Greek bonds with lower coupon rates along with some sweetner paper.  The deal's face value is just over half the face value of the old bonds.  But wait, investor confidence in the new Greek bonds is so high that they're trading at only about 20% of face value.  The net result is private Greek bond holders took a haircut of somewhere around 70% on the face value of the old bonds.

In other news, invoking the collective-action clauses was ruled a credit-event, triggering payment on the credit default swaps.  The net exposure is estimated to be only about $3.2 billion.  To paraphrase Warren Buffett, we'll find out if anyone's been swimming naked at the Greek CDS beach over the next few weeks.

Not to worry, this certainly won't be the final act in the play.

Corporate Bond Market Racks a New Record

If my math is right, corporate bond issues topped $48 billion last week.  I think that's a new all-time weeekly record.  Unless I get sidetracked, there should be a Fool article with the highlights early next week.

ZIRP Zings a Money Market

I got a notice from my company's 401k provider,  Principal Financial, regarding the plan's money market option this week.  Principal had been waiving management fees on the fund and has decided not to continue.  That means the return on the mm will be going from a couple of basis points positive to something a bit less than zero.  Yep, folks will have to pay to hold cash in their 401k.

I don't blame Principal - can't really expect them to offer a product at a loss.  I do blame the Fed's zero interest rate policy.  In the ongoing effort to stimulate growth with ultra-low rates, the Fed is also sticking it to savers.  A good number of those savers are retirees and near-retirees who look to cash accounts for stability.  I wonder if taking the funds rate to half a percent would be such a terrible thing.

Principal probably won't release data, but it would be interesting to know if people transfer funds out of the money market account based on this policy change.  In our plan, the money market is a seperately managed account and doesn't have a nice, round $1 per share value, so it won't be as obvious if the share price drops a little.

Anyone aware of other money market funds that plan to stop waiving fees and let returns go negative?

That's it for now.  'tis a nice day and the dog needs a walk.

As always, thoughts and comments are welcome. 


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