The Markets April 29, 2013

NYC Pension Funds Sue BP

The New York City Pension Funds have filed a lawsuit against British Petroleum (BP).
Reported by

The City Pension Funds are seeking to recover investment losses caused by BP’s fraudulent statements issued prior to, and after, the April 20, 2010 Deepwater Horizon disaster, according to an announcement from City Comptroller John C. Liu. “BP failed to disclose to shareowners the serious risks involved in its offshore drilling operation,” Liu said. “After the spill began, it misleadingly attempted to minimize the extent of the damage and the cost to shareowners.”

Inga Van Eysden, chief of the New York City Law Department’s Pensions Division, added, “In light of the Supreme Court’s ruling in Morrison v. National Australia Bank, Ltd., the City Pension Funds are barred from seeking recovery from BP under federal securities laws for the vast majority of its losses. We strongly believe the Funds deserve to be compensated for BP’s fraudulent actions and are therefore pursuing this case.”

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The complaint filed in the U.S. District Court for the Southern District of New York alleges BP and its officers and directors failed to disclose the material facts regarding the dangers inherent in the offshore drilling operation, the extent of the leak, and the estimated cost of the cleanup.

The New York City Pension Funds held a combined 2,822,840 shares in British Petroleum valued at $19,301,743.45 as of April 15, 2013. The transactional investment losses to pension beneficiaries caused by BP’s misconduct and fraudulent behavior are estimated to exceed $39 million.

Other public funds have filed similar lawsuits (see “Oregon Public Pension Sues BP”).

The Markets April 26, 2013

Bond Rally Could be Ending

Bond investors could be living in a bubble, as rising bond prices may be obscuring the truth of less-than-zero yields on Treasury notes. 
Reported by

Investors may think their bond investments are safe, even though inflation-adjusted yields on 10-year Treasury notes have been less than zero since January 2012.

“Treasuries and other traditional bonds are widely assumed to be ‘safe,’ but are just as subject as any other fixed-income investment to losses in value should interest rates rise,” said Nathan Rowader, director of investments and author of the study by Forward Management, “The 5% Problem: Double Jeopardy for Bond Investors.” The title of the study refers to the 5% long-term average annual yield for U.S. government bonds from 1926 through 2012.

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Rowader cited current market conditions—low yields, moderate inflation and high public debt levels—which he claims are almost identical to those of 1941, as evidence that bonds are entering a bear market climate. While he does not expect to see the bond bubble burst, Rowader said that they are likely to gradually “melt away” as returns from traditional bonds erode and investors are unable to meet their investment goals. 

According to Forward’s study, a rise in interest rates could cause investors to lose even more value in their existing bond portfolios than they stand to gain in annual after-tax return. The total return from a traditional government bond index averaged 8.8% annually from 1981 through the end of 2012.

The report is available for download here.

 

Sara Kelly

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