Tuesday, June 17, 2014

Fed Mandated Exit Fees Coming to Your Bond Funds

How safe is your bond fund? If this another move to push funds out further on the risk curve? 

From David Stockman's Contra Corner......

In short, in its mindless drive to manipulate financial markets and generate artificial demand for credit, the Fed has created the potential for a massive run on bond funds should a new financial crisis be triggered  by one black swan or another. And once again it is evident that the market’s natural process of “price discovery” has been destroyed in favor of ham-handed “price administration” by our monetary central planners.

Yet the monster they have already created—-a massive log-jam at the bond fund exit gates—-would pale compared to the deformations and anomalies that would result from the imposition of a government dictated exist fee on unsuspecting investors. Even the announcement of a rule-making would potentially trigger the very kind of sell-off that it would be designed to prevent. And if corporate bond prices took a tumble, it would not take long for equity markets to recognize that the massive flow of new debt capital which has been used to fund record stock buybacks could suddenly dry up.

Not surprisingly, the big bond houses are lining up in favor of government imposed exits fees and gates. They would like nothing better than to keep investors captive, collect the fees and blame Washington for the inconvenience to investors.

The next round of crony capitalism is already underway.
Exit fees would seek to discourage retail investors from withdrawing funds, thereby making their claims less liquid and making a fire sale of the assets more unlikely.
Such fees could be highly unpopular with retail investors unable to access funds without paying a fee. But some in the industry would welcome them; BlackRock, the world’s largest asset manager, has called for international rules setting exit fees on some funds.

The remainder of the article can be found here.

No comments:

Post a Comment