SEC Member Warns of Rate Risk, Raises Tumult

It’s been a week now after Daniel M. Gallagher, a member of Securities and Exchange Commission was accused of being overly pessimistic about bond market. Some consider him to trying to raise panic with his “Armageddon” reference, but Gallagher makes no apologies for his attempts to raise some awareness. According to him, he made the comment in the context of credit risk added with the rate risk, which are the two major factors. Combined, these two figures are of paramount importance to the market, and investors tend to underestimate them. He added that the population of investors in the space may require that they have to double down on investor education.

On April 16 a roundtable meeting sponsored by Securities and Exchange Commission was held, where Daniel Gallagher caught the members off guard saying that “we’ve got Armageddon on our hands” in reference to a combination of rising rates and muni bankruptcies, which recently hit California. Even though the phrase was not as startling as 2010 predictions by Meredith Whitney, the tumult raised is considerable. By referencing to recent California muni bankruptcies, Daniel Gallagher touched the issue of both rate risks and credit risks.

With $3.7 trillion muni market is made up by individual investors, no one can predict what their sentiments will be after the rates tart going higher. Even though defaults are likely to be a somewhat remote scenario, interest rate risk for those who sell ‘premature’ bonds is substantial. The purpose of the roundtable meeting was to speed up fixed-income markets.

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