Bonds

(Washington)

Many in markets may be cheering Donald Trump’s tax plans. It amounts to a major tax cut for business owners and the wealthy. However, one of the darker sides to Trump’s plan could be its effect on municipal bonds, a favorite among retirees. The reason why is that the overall tax cut would lower the overall incentives to buy munis versus other types of fixed income, as interest earned would be taxed at a lower rate.


FINSUM: This seems like it could lead to some sizable losses for muni bonds, as it would weaken one their key features. The primary impact will be on middle-income retirees, who are the primary buyers of munis.

Source: Wall Street Journal

(New York)

The whale of all financial scandals looks like it may be about to occur. For the last couple of years there has been muted talk of a trading scandal in US Treasury bonds. Like the Libor-rigging scandal before, this new probe centers on market manipulation and possible collusion between firms during US government bond auctions. Goldman Sachs was the first to announce (in 2015) that it was being investigated, but the investigation is reportedly going further, with UBS, Morgan Stanley, BNP Paribas, and RBS, all receiving subpoenas last week.


FINSUM: This has massive implications. Firstly, a big scandal could slow financial deregulation or even reverse it; and secondly, this could lead to eye-popping fines for banks, and thus a hit to shareholders. It also has implications for Trump’s team, which includes many Goldman Sachs alumni. Furthermore, the fact that banks may have been directly defrauding the US government at Treasury auctions might make the whole situation much worse, including in terms of PR.

Source: Financial Times

(San Juan)

It is a dark day for the municipal bond market. After years of restructuring and legal battles, Puerto Rico announced bankruptcy yesterday. It is the largest ever bankruptcy in US municipal history and it sets the stage for a grand battle with Wall Street creditors. To give a sense of scale, Detroit’s legendary bankruptcy in 2013, which was then the largest on record, amounted to $9 bn owed to creditors. Puerto Rico, by contrast, owes $73 bn to creditors—8x the size of Detroit’s collapse.


FINSUM: This is going to be a serious fight. Puerto Rico will use a Title III restructuring process which is entirely separate from the US bankruptcy system.

Source: Wall Street Journal

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