The Stash

Bondholders Not Sleeping Well

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Per my recent post about whether bondholders will get stiffed amid the current bank bailouts, Bloomberg has a worthwhile piece the sentiment in the bond market:

Citigroup Inc. and Bank of America Corp.’s bond prices are sliding on concern that owners of debt issued by U.S. financial firms will be forced to swallow losses if the industry needs another bailout.

U.S. bank debt has lost 7.6 percent and yields have jumped to record levels compared with benchmark rates in the past month, even after taxpayers committed more than $11.6 trillion to prop up financial firms. With shareholders almost wiped out at banks like Citigroup and lawmakers resisting more rescues, holders may be asked to swap bonds for new debt that offers reduced interest rates or lower face values, analysts said.

“The bond market is getting more scared every day,” said Gary Austin of PDR Advisors in Charlotte, North Carolina, who manages $450 million in fixed-income securities. “At some time, the government is going to say enough is enough, the only way we will give you more cash is if the bondholders have to be hit.”

Debt investors are an attractive target because of the size of their holdings -- more than $1 trillion just at the four largest U.S. banks -- and because they’ve emerged almost unscathed so far.  ...

Yields relative to benchmark rates on bank bonds average a record 8.23 percentage points, 3.65 percentage points more than industrial companies’ debt, according to Merrill Lynch index data. Before August 2007, when the credit crisis began, bank bonds paid spreads less than industrial-related debt.

Obviously the concern is justified. At some point it will presumably be very heard politically to keep our hands off the bondholders. And I'm not convinced it would be a terrible decision to renegotiate the terms of some debt if done in an extremely delicate, orderly way.

Update: Commenter gwolfjr makes a good point, which is that there's no need to be quite so prudish--bond terms get rengotiated all the time. That's fair enough. My point was just that you want to be careful if you're doing it sem-systematically, so you don't set off a global financial panic...

--Noam Scheiber

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