This is an interesting article, i had been meaning to post.. so MER and PRU are long the Nov 21 bonds .....
maybe -g- Jim Bianco seems to have a point. But in times of real financial crisis it seems like a US Govt
bond might be the better reference point.
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Bond Benchmark Proposal Has Sparked Heated Debate
By MICHAEL S. DERBY
Dow Jones Newswires
December 4, 2001
NEW YORK -- Debate is heating up over a proposal made late last week that would designate the November 2021 U.S. Treasury bond as the benchmark for long-term interest rates.
If implemented, the issue would supplant the current 30-year bond in that role and would serve as the basis on which long-dated corporate debt deals are priced.
The switch has the support of a number of big firms on both the dealer and investor sides of the fence, perhaps enough to give the idea critical momentum. Merrill Lynch and Prudential Investment Management are two big names in favor.
But the proposal also faces skepticism over its effectiveness, with some analysts suggesting it may be part of an effort to offload unprofitable positions.
The search for a new benchmark reflects the fluid financial situation of the U.S. government. In October, the Treasury Department suspended further sales of 30-year bonds. That exacerbated the already diminishing liquidity in the longest-maturity Treasury bond, which had seen the size of its issuance cut in recent years.
The Treasury move "crushed" liquidity in that maturity and stripped the 30-year issue of its status as a "viable benchmark," said Peter Cordrey, managing director and Treasury trader at Prudential Investment Management in Newark, N.J. He has asked those with whom he deals to quote certain types of trades against the November 2021 issue.
In the meantime, Wall Street has been searching for a benchmark alternative.
While the 10-year note has already taken over the role of de facto bellwether for many fixed-income market participants, the 30-year continues to be looked to for pricing information at the longest end of the debt markets.
Proponents of the November 2021 benchmark say the issue has good liquidity, with about $30 billion outstanding, making it a good replacement for the 30-year bond, with $10 billion outstanding.
"I've been a big proponent" of the change, said Mr. Cordrey at Prudential.
Gerald Lucas, senior government-bond strategist at Merrill Lynch, said adopting a new benchmark would be a "win-win for all concerned," given liquidity considerations and the security's ability to serve as a de facto proxy for the Treasury bond futures contract.
The Bond Market Association, a trade group for bond dealers, says setting benchmarks is the market's business and doesn't require the group's approval. "The dealers will work this out among themselves," said Eric Foster, a BMA vice president. "We have no plans to endorse a particular benchmark."
Some market participants say there are better alternatives to using the 2021 issue, such as rates in the agency and swaps markets. "There are lots of ways you can price corporate bonds and agencies ... You don't need to pluck some Treasury issue out and decide this is what we are going to use," said Jim Bianco, of Bianco Research in Barrington, Ill.
Others say proponents may have been seeking to stir up the markets to unload bad positions they were holding. Just the speculation about the 2021 issue as a benchmark has created support for the issue, they note.
But many believe something will happen, if only as a stopgap measure. "It's inevitable that we are going to have to look for something" as a viable long-end benchmark, said Stephen Stanley, senior market economist with Greenwich Capital Markets, in Greenwich, Conn. |
