Treasuries Extend Slump as S&P 500 Adds to Weekly Gain

Treasury 10-year notes extended the biggest weekly drop in eight months amid concern inflation may accelerate as the economy improves. Oil increased, while U.S. stocks capped the biggest weekly gain of the year.

Ten-year Treasury yields added one basis point to 2.29 percent at 4 p.m. in New York after the cost of living in the U.S. rose the most in 10 months. The benchmark note’s rate surged 26 basis points this week. The S&P 500 added 0.1 percent to 1,404.17, the highest since May 2008, and climbed 2.4 percent in five days. The VIX, the benchmark gauge of U.S. stock options, slid to an almost five-year low. Oil halted a two-day drop as the dollar fell versus 14 of 16 major peers.
Stocks rallied this week, Treasuries slid and money-market rates rose after the Federal Open Market Committee members raised their assessment of the U.S. economy on March 13. Reports yesterday showing growth in manufacturing in America’s northeast and a drop in jobless claims also bolstered confidence in the world’s largest economy.

“We’ve seen stronger data in the U.S.,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade Treasuries with the central bank. “The Treasury market is trading on U.S. fundamentals and Fed expectations.”

The difference in yields between 10-year notes and Treasury Inflation Protected Securities climbed to 2.41 percentage points, the most since August, as investors sought a hedge against rising prices.

The consumer-price index climbed 0.4 percent in February, matching the median economist forecast and reflecting a jump in gasoline that failed to spread to other goods and services. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.1 percent, less than projected.
Fed Statement

The Fed’s policy statement on March 13 drove money-market derivative traders to bring forward the time when they predict the Fed will first lift its target of zero to 0.25 percent and damped speculation the Fed will buy more debt in a third round of quantitative easing, or QE3.

Forward markets for overnight index swaps, whose rate shows what traders expect the federal funds effective rate to average over the life of the contract, signal a quarter percentage point advance in approximately the September and October 2013 period, according to data compiled by Bloomberg as of March 15. Last month, such an increase in the effective rate wasn’t predicted until early 2014. This year the effective rate has averaged 0.15 percentage point below the top end of the target range that the Fed reiterated three days ago.
Gains Pared

The S&P 500 pared early gains today after reports on industrial production and consumer confidence trailed estimates, tempering optimism about the economy after data yesterday showed jobless claims matched a four-year low and a Fed gauge of manufacturing in the New York area showed the strongest growth in a year. The Dow (INDU) Jones Industrial Average slipped 20.14 points, or 0.2 percent, to 13,232.62 to snap a streak of seven straight gains and retreat from the highest level since 2007.

Energy, raw-material producers and financial shares led gains among the 10 main groups in the S&P 500, while consumer- discretionary companies and utilities fell the most. Bank of America Corp. and Alcoa Inc. rose at least 1.4 percent for the biggest gains in the Dow, while United Technologies Corp., Microsoft Corp. and Walt Disney Co. fell the most.

The S&P 500 closed above 1,400 for the first time in almost four years yesterday and is up almost 12 percent this year, poised for its best first quarter since 1998.
Financials Rally

Financial shares in the S&P 500 rose 5.9 percent as a group this week to lead gains among 10 industries after most U.S. banks passed Fed stress tests. The group has surged 21 percent this year. Thomas Lee, JPMorgan’s chief U.S. equity strategist, and Jonathan Golub, his counterpart at UBS AG, said in reports that financial companies may add to the rally if longer-term interest rates continue to rise, boosting profitability from lending.

The yield curve, or difference between rates on 10-year and two-year Treasuries, climbed to a five-month high of 193 basis points today.

“We believe this week’s move in Treasuries is the culmination of recent economic success,” Golub wrote in a report dated today.
Quadruple Witching

Futures and options on equity indexes expire today in a process known as quadruple witching. About 1.1 billion shares of S&P 500 companies changed hands in the first hour of trading, almost double the average for that time period over the past 10 days. About 8.3 billion shares had changed hands on all U.S. exchanges by the end of the day, the second-busiest session of the year.

The Chicago Board Options Exchange Volatility Index slid 6.2 percent to 14.47, the lowest level on a closing basis since June 2007, amid reduced demand for options to protect against losses in stocks. The gauge known as the VIX (VIX) lost 15 percent this week, its biggest slide in more than three months.

Oil increased 1.9 percent to $107.06 a barrel on speculation demand will climb as the economy gains momentum. Treasury Secretary Timothy F. Geithner said yesterday rising oil prices show “we still face a dangerous and uncertain world” and there’s no easy way to lower gasoline costs. Brent crude, gasoline, heating oil and natural gas rose at least 2 percent to lead gains among 13 of 24 commodities in the S&P GSCI Index, which rallied 1.5 percent for its biggest gain in almost a month.
European Shares

Three shares gained for every two that fell in the Stoxx 600. Subsea 7 SA, the oilfield-services provider formerly known as Acergy SA, rose 5.3 percent after declaring a special dividend and saying it will buy back shares. Porsche SE (PAH3) retreated 3.6 percent as Sanford C. Bernstein & Co. downgraded the sports-car maker.

The German five-year yield rose nine basis points to 1.06 percent, its highest level of the year.

The yen was poised for its sixth consecutive weekly decline against the dollar. The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, slipped 0.5 percent.

The MSCI Emerging Markets Index (MXEF) fell 0.2 percent, trimming its weekly gain to 0.3 percent. India’s Sensex index fell 1.2 percent and Russia’s Micex Index (MICEX) lost 0.7 percent. China’s Shanghai Composite Index (IFB1) increased 1.3 percent, halting a two- day slide. Emerging-market equity funds lured $456 million for the week ended March 14, Citigroup Inc. analysts led by Markus Rosgen wrote in a report today, citing data compiled by EPFR Global.

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Dodd-Frank Rules Slow at SEC After Court Cost-Benefit Challenge

Less than halfway through the process of implementing the 2010 Dodd-Frank Act, the pace of rule-writing by the U.S. Securities and Exchange Commission has slowed by about half.

The agency’s five commissioners haven’t met once in the last four months to approve or propose regulations required under Dodd-Frank, designed to curb the kind of risky practices that fueled the 2008 financial crisis.
Enlarge image SEC Chairman Mary Schapiro

SEC Chairman Mary Schapiro told reporters in Washington last month, “It’s easier to propose rules than it is to adopt them.” Photographer: Joshua Roberts/Bloomberg

SEC Chairman Mary Schapiro acknowledged the slowdown, describing it as a “natural lull” after an initial gush of proposals.

“It’s easier to propose rules than it is to adopt them,” Schapiro told reporters in Washington last month, particularly after a court rejected one agency rule over its costs.

The rule-making holdup is extending a period of uncertainty for affected firms -- some welcome the delay of unwelcome regulations, others would prefer clarity.

Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, described the law as imposing “impossible deadlines.”

“They’ve given them a 2,400-page piece of legislation that really directs the regulators to do all the hard work,” Quaadman said.

Among the rules in limbo are the so-called Volcker rule to ban banks’ proprietary trading, restrictions on asset-backed securities deals, and forcing firms to disclose whether manufacturing metals were mined in war-ravaged parts of Africa.
Financial Revamp

Enacted in 2010, Dodd-Frank requires U.S. regulators to write hundreds of new rules to revamp how the financial sector does business, and more of those rules were assigned to the SEC than any other agency.

In the first year after the law’s passage, the agency voted to approve 108 proposals, adoptions and rule concept releases, according to data compiled by Bloomberg, most of them related to Dodd-Frank. That’s an average of nine per month.

Since the law’s one-year anniversary July 21, the register has recorded only 39 rulemaking SEC votes, or about 5.3 a month, the data show.

Much of the recent activity has taken place behind closed doors, adding to the appearance of a slowdown. Since Oct. 26, the agency has adopted only nine rules and did so without holding a single public meeting, conducting the votes by paper ballot.

Schapiro offered several explanations for the SEC’s slower pace, including the complexity and high volume of public comments on recent rules, and the fact that a new commissioner joined the five-person panel last November.
Rule Rejected

The most important factor cited both by Schapiro and agency observers, however, is legal. Last July, the U.S. Court of Appeals rejected an SEC rule that would have made it easier for shareholders to insert board candidates onto public-company ballots, saying the agency failed to adequately assess the costs.

The rejection of the so-called proxy access rule made all future SEC rules vulnerable to a similar challenge, forcing Schapiro and her agency to redouble efforts to study cost- benefit effects.

“We are clearly taking more time on cost-benefit analysis,” Schapiro said.

The court decision was “like sticking a two-by-four in the spokes” of SEC rulemaking, said Lynn E. Turner, a former chief accountant at the agency who is now managing director of Litinomics Inc., an economic and legal consulting firm. “I think it’s going to get worse, not better.”

Congress may exacerbate the problem, he noted: A House committee recently approved a bill that would demand a more rigorous cost-benefit justification for each rule.
Two Votes

The SEC -- like other U.S. agencies -- uses a two-step process for writing and approving rules. The first stage is to issue a proposal and then invite public comments; the second stage is to adopt the final version. The commission votes on both stages.

So far the agency has proposed about 75 percent of its Dodd-Frank rules, and completed about 20 percent of them.

“We are currently reviewing thousands of comments from some of the proposals we issued to ensure that we get the final rules right,” said John Nester, an SEC spokesman, in a statement.

Over the same timeframe, another agency working to implement Dodd-Frank, the Commodity Futures Trading Commission, has managed to accelerate its rulemaking. According to the Federal Register, the CFTC proposed or adopted about seven rules a month in the first year after Dodd-Frank and 10.2 per month since then. Though both agencies are focusing on Dodd-Frank work, including some joint rules, the rulemaking isn’t always comparable.
Financial Crisis

Some of the SEC’s delayed rules strike at the roots of the 2008 crisis. One example is a rule that would ban firms from designing asset-backed securities deals that put their interests in conflict with investors. The SEC didn’t propose the rule until September, five months after the law said it should be adopted. The proposal’s comment period was extended twice; the commission has yet to schedule a final vote.

Other rules are being drafted and revised in coordination with other regulators, complicating the process further. Those include the so-called Volcker rule to ban proprietary trading at banks, the risk-retention rule forcing lenders to keep a stake in loans they bundle and several rules defining new swaps market oversight.
Conflict Minerals

Among SEC-only measures delayed by the slowdown is a Dodd- Frank rule requiring companies to trace the origins of metals linked to violence in central Africa.

“It is critically important the SEC quickly finalize the rule,” U.S. Senator Patrick Leahy of Vermont and six other Democratic lawmakers wrote to Schapiro on Feb. 16. With a rule in place, “the smuggling that has emerged will become less economically viable, and the people of central Africa will benefit from further reduced violence and increased economic opportunities.”

The SEC is now almost a year past the congressional statutory deadline for a similar rule to require oil, gas and mining companies to disclose payments to foreign governments for access to resources, said Ian Gary, a senior policy manager at Oxfam America, the humanitarian group’s U.S. arm.

Every year of delay “is another year that people go hungry and have a lack of education and schools because oil and mining revenues aren’t being used properly,” Gary said.

The regulator is also working on assigning broker-dealers a new standard for dealing with retail clients -- a fiduciary duty to parallel the standard that investment advisers work under.

In April, that rule was moved from the agency’s Dodd-Frank working calendar to a catch-all category: “Dates still to be determined.”

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Tax Liens Promising 18% Returns May Be a Case of ‘Buyer Beware’

After Brian Finkelstein first heard about tax-lien investments three years ago, the former bond trader found the potential for 18 percent returns so compelling he jumped into the business full-time.

Like other investors, Finkelstein, chief executive of Broad Financial LLC in Monsey, New York, is hunting for yield as the Federal Reserve indicates it may keep interest rates “exceptionally low” through 2014. Yet high fees, illiquidity and a lack of transparency are a few of the pitfalls investors may encounter with private funds that buy claims to delinquent property taxes, said Alan Zafran, a partner with Luminous Capital.
Enlarge image Tax Liens Promising 18% Returns May Be a Case

An unfinished house, fenced and abandoned, in Hinsdale, Illinois. Photographer: Chuck Berman/Chicago Tribune/MCT via Getty Images
Enlarge image Tax Liens

Carl Smith, tax collector for the town of Orange, second from right, prepares to record payments from winning tax-lien auction bidders, lined up at left, at the municipal building in Orange, New Jersey. Photographer: Emile Wamsteker/Bloomberg

“It’s caveat emptor: Buyer beware,” said William Waller, a Washington-based real-estate lawyer who has worked on about 2,000 to 3,000 tax-lien cases, referring to the fact that jurisdictions that sell the liens generally don’t guarantee the condition or market value of the properties.

Tax liens, or tax certificates, generally are sold to investors at auctions and are secured by claims on the underlying real estate that take priority over mortgages. Interest generally accrues on the taxes owed at rates set by auction, which property owners must pay to clear up the debt. If they don’t, an investor who bought the lien may foreclose on the property.
Market Size

About $7 billion to $10 billion in delinquent property taxes are sold to investors annually, according to estimates by Trace Platform LLC, which provides clearing, transfer and escrow services for tax-lien trades and isn’t related to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Counties and cities in 28 states and Washington, D.C., sell the liens to investors, according to Brad Westover, executive director of the Jupiter, Florida-based National Tax Lien Association, a membership group for tax-lien investors and servicers.

The certificates generally are regulated by the states, Waller said. Rules on maximum interest rates, waiting periods before a foreclosure may proceed, how fees and interest are assessed on the debts and how auctions are conducted vary among jurisdictions, said Tom McOsker, head of the tax-receivables brokerage unit for New York-based GFI Group Inc. (GFIG), which runs a secondary market for the certificates. Florida auctions the certificates online, and the District of Columbia holds live bidding. In New Jersey the maximum interest rate a lien may accrue is 18 percent, and in Iowa it’s 24 percent.
New Jersey Auction

At an auction in December, bidders on a first-name basis with one another chatted in the aisles and cracked jokes as they trickled in to the second-floor courtroom of the municipal court in West New York, New Jersey. In the hour leading to the auction some bidders, a few wearing wireless headsets and hunched over laptops, combed through lists of the more than 400 liens up for sale with highlighters.

Kerri Tierney-Campen, the tax collector for the Town of West New York, began the auction by calling out liens that were no longer available because they’d been paid off that morning. The liens up for auction ranged in size from $189 in taxes owed to one debt of $105,478. Once bidding started, potential investors called out the interest rates they’d want to earn on each lien, with bids starting at 18 percent and then moving lower. About 20 people attended, including about 13 bidders.
Tax Treatment

Average returns for tax-lien funds aren’t available, GFI’s McOsker said. A diversified portfolio of “quality” assets, meaning liens that redeem before the waiting period is over and before the buyer may foreclose, could return about 6 percent to 9 percent annually, he said. Most tax-lien funds sell shares directly to investors, rather than going through a broker- dealer, he said.

The tax treatment of profits and losses on tax-lien investments varies, depending on several factors, said Eric Smith, a spokesman for the U.S. Internal Revenue Service.

Investors may be better off buying shares in certain bond mutual funds that invest in mortgage debt, such as DoubleLine Total Return Bond Fund (DLTNX), said Zafran of Luminous Capital, which manages about $4.7 billion for individuals and families, and doesn’t own tax liens.

The DoubleLine fund had about 83 percent of assets in mortgage-related securities as of December, according to the fund’s website. It returned 9.2 percent in 2011, according to data compiled by Bloomberg. High-yield corporate bonds, or those rated below investment grade, returned about 4.4 percent in 2011, as measured by the Bank of America Merrill Lynch U.S. High Yield Master II Index, Bloomberg data show.
‘High Fees’

“You have limitations on when and if you can pull your capital” from a private fund, Zafran said. “And you’re going to be subjecting yourself to a high set of fees.”

Finkelstein, 52, who traded bonds and derivatives for 15 years prior to starting his company, now manages private placements that invest in the liens. When buying into one of Finkelstein’s funds, investors generally must commit to locking up their money for a certain period of time, such as one year. After that point the funds begin to distribute cash to investors as liens are paid off, a process that may take about 1 1/2 years to complete, Finkelstein said. Because the funds don’t liquidate until the last lien or foreclosure in the portfolio is paid off or resolved, there’s no precise certainty as to when investors will get all of their cash back.
Accredited Investors

Finkelstein said after fees, which are 2 percent annually plus 20 percent of gains, one of the funds he manages returned about 8 percent in 2010. Returns aren’t yet available for 2011 and as of Aug. 1 the fund was on track to earn about 7 percent for the year, he said. The funds are available only to accredited investors, which generally means individuals with assets of greater than $1 million, excluding a primary residence, or earning more than $200,000 annually.

Finkelstein invests primarily in New Jersey and said he mostly buys liens on single-family homes in more affluent areas, where he said the certificates are backed by stronger collateral and there’s less of a chance a lien will go to foreclosure.

“More than 99 percent of the time the bank will pay you off,” rather than allow a foreclosure to proceed, if a homeowner hasn’t paid the taxes and the property hasn’t dramatically depreciated, he said. That’s because the lien can wipe out a mortgage of greater value.
Distressed Properties

“If you have a $100,000 property and a $2,000 tax bill -- well good heavens -- no one’s ever going to walk away from a $100,000 property for $2,000, if the value truly is $100,000 and the property is still standing,” Westover, of the tax-lien association, said.

One risk with purchasing liens on distressed properties is that between the time an investor buys the certificate and the date they could foreclose, additional taxes and assessments can add up even as the value of the property may fall.

Some certificate buyers have seen their investments go underwater, meaning the value of the liens exceeds the value of the real estate, as property values have declined, said John Reid, an attorney with Tobin, O’Connor & Ewing in Washington.

“You’re investing today on a lien-to-value ratio and hoping it either stays the same, or appreciates,” Reid said.

Nationally, lien-to-value ratios average less than 10 percent, McOsker said. Those ratios may afford investors a margin of safety, yet tax-lien investors generally must pay off additional liens that have accrued on a property, such as for unpaid water bills, additional property taxes or related fees from the county or municipality, to complete a foreclosure, Waller said.
Bankruptcy Priority

Liens for taxes owed to the IRS generally take priority over liens for property taxes in a bankruptcy, said Donald Dinan, a partner with Roetzel & Andress in Washington and general counsel for the association of lien investors. Homeowner bankruptcies generally halt the progress of foreclosures and can tie up investors’ money for years, Reid said.

If there are multiple tax liens and multiple investors attached to a property, generally the buyer with the earliest certificate has the right to foreclose first, with rules varying by jurisdiction, Dinan said.

A certain portion of lien sales get voided after an auction because the taxes were improperly assessed, Reid said. In some areas, such as Washington, D.C., the jurisdiction pays the purchaser interest owed on voided certificates and in some, including most parts of Maryland, they don’t, Dinan said.

Ruben Rodriguez, 37, who lives in West New York, attended the December auction and said he was there to learn.
‘Safe Investment’

“I definitely want to invest in my own neighborhood,” he said. Rodriguez works in New York City as a billing manager for the Mount Sinai Medical Center, he said in a telephone interview after the auction. He said he’s attracted by the potential to acquire properties for less than 10 percent of their values, if the liens go to foreclosure.

“If you know what you’re doing and you’re buying properly it’s a relatively safe investment and gives you an outsized yield, compared to what else would be available in the marketplace,” said Albert Friedman, who manages about $60 million in a tax-lien fund for Boca Raton, Florida-based Alterna Capital Management, which bid at the West New York auction in December. “You have to be big enough to attend a number of auctions, buy a number of certificates and have people on the ground,” Friedman said. He declined to comment on the fund’s returns or redemptions policy, citing regulatory restrictions on advertising by private placements.
EBay Store

When institutional investors want to unload a lien prior to foreclosure they may sell it to a specialist such as Dan Friedman, managing member of Elmhurst, Illinois-based Optimum Asset Management LLC. In addition to managing about $15 million in liens on behalf of family offices and other investors, Friedman’s firm sometimes negotiates directly with homeowners to come up with a payment plan, and in other cases forecloses and then resells the properties.

“We move a fairly high volume of foreclosure properties online,” through the firm’s store on the EBay Inc. (EBAY) website, which on Feb. 7 had two properties listed for sale, including a single-family home in Cleveland with a current bid of $920.

Investors considering putting money into a tax-lien private placement should take precautions to ensure they’re not the victims of fraud, said Andrew Altfest, executive vice president of Altfest Personal Wealth Management, a New York-based investment adviser that manages about $800 million on behalf of individuals and families.
Investor Precautions

“You’re investing with a private fund that’s not going to have the same amount of regulation,” as securities offered to the general public such as mutual funds, Altfest said. Investors should “make sure that the fund has a reputable auditor,” and an administrator who signs off on every transaction, he said.

Investors should check the background of tax-lien fund managers with their state securities regulator before investing, said Jack E. Herstein, assistant director of the Nebraska Bureau of Securities.

Since 2008 at least six individuals have pleaded guilty to conspiring to rig bids at New Jersey and Maryland tax-lien auctions, according to press releases from the U.S. Department of Justice. The Justice Department continues to investigate the auctions, said Gina Talamona, a spokeswoman.

“At an open outcry auction there’s always the possibility of three guys hunkered around the water cooler talking about what they’re interested in,” Westover said.

JPMorgan Chase & Co.’s Xspand unit received a subpoena as part of a Justice Department investigation in 2009, according to a prospectus for New York City tax-lien bonds serviced by the firm. The firm announced in July it would begin exiting the business. Jennifer Zuccarelli, a spokeswoman for the New York- based bank, declined to comment on the subpoenas.

“The beautiful thing I’ve learned over the years is: Delinquent taxes never go away,” Westover said. “Even in a good economy, there are still delinquent taxes.”

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