Exit Fees

Interest rates are now at multigenerational lows.  Amazingly, sovereign government bond rates in places like Spain and Italy actually carry lower ten year bond yields than US Treasuries.  Junk bond spreads to US Treasuries are at levels highly suggestive of being over valued.  Irrespective of these facts and irrespective now of a two year bullish phase in stocks that have seen global stock markets post for the most part nice double digit gains, money flows into bonds have been positive in 2014.  This bet has paid off this year as yields have declined.  Declining yields mean the price of bonds goes higher.  The reverse occurs when interest rates rise.

The question that must be asked is what's going to happen when rates reverse themselves for longer than a few weeks.  How much of that money currently parked in bond funds is going to stay put?Apparently some folks in Washington are wondering the same thing.  The Financial Times {FT} yesterday published an article where they noted that "Federal reserve officials have discussed whether regulators should impose exit fees on bond funds to avert a potential run by investors."  The FT states that "US retail investors have pumped more than $1 trillion dollars into bund funds since early 2009.  This has created a boom environment for fixed income money managers, but raises the prospect of a massive disorganized flight of money out of the industry should interest rates rise sharply in the coming years."  

The article goes on to state that the chances of such a change currently occurring are remote as the SEC does not seem to be in favor of it.  But it does show what could happen and what is potentially on the drawing boards when the tide goes out in this neck of the investment waters.  "Sell when you can, not when you have to," is another of those old Wall Street maxims.  In the case of the bond markets, with rates at levels where it's virtually impossible for them to go much lower, the faint tinkle of the bells being brought out when it's time to sell may now start to be heard.  I do not offer investment advice regarding specific investments on this blog as that is not the intent of what I do here.  But in regards to the asset class of fixed income, particularly when it comes to bond funds {either mutual funds or ETFs} these are now marked for sale in many of my client accounts.  Marked for sale does not mean I will be a seller today or tomorrow.  It does mean that I have no problem in the coming months of selling off these assets when I feel the secular trends have turned against me.  That process I believe will accelerate if I become more concerned that the Government imposes an exit cost to my clients if they want to exit the trade.

*Long certain bond funds and other fixed assets in client accounts.

Financial Times:  Fed Looks at Exit Fees on Bond Funds.