The uncertainty which has sent the stocks to 12-year low has now started to affect the corporate bonds and loans which had resulted into a lot of gains earlier in the year. The short-term credit markets are still doing better than the last year. This is a result of the programs taken up by the government to buy commercial paper and guarantee short-term debt.
Bond investors are worried about the fact that government's repeated modification to its financial rescue packages are undermining the foundation of bond investing. They want the assurance that the creditors should have the right to claim their assets first if a borrower defaults. If government cannot provide this assurance, it is risky to own bonds of stalwart institutions even.
Another important thing that is to be noted here is that investors are not sure about the government’s plan to bolster U.S. banks which can help in unfreezing the credit market. It is expected that the market could continue to drop unless there is clarity from the government on its bailout plans. Rather it would harm the economy further.
Bond investors are anticipating that the value of the bonds will further go down if government reworks its plans to bail out homeowners. The government is planning to come up with a new bill called the "Helping Families Save Their Homes in Bankruptcy Act" which will allow the bankruptcy judges to alter the terms of mortgage loans.
If this bill comes into affect then the securities tied to those loans will suffer losses. This may also result in dropping of their ratings. Bank of America Securities has estimated that the bill could affect some $500 billion of mortgage security holders. These investors are now planning to drop off their stakes in order to avoid enormous losses or write-downs.
Let's hope that government will come to the rescue of the bond investors to some extent. In my opinion, the government should come up with a plan which will help both the bond investors and borrowers.