- April 18, 2017
- Posted by: Sean Vesey
- Category: Editorial
Bearer Bonds, Where Have They Gone?
Bearer bonds (no, not Barry Bonds) have gone the way of the dodo bird, beta-max, or the Jell-O pudding pop. Once a staple in the municipal bond market, you rarely come across them these days. Bearer bonds became popular because they were debt instruments that were owned by the holder. There was no owner of record on file and the coupons and principal were payable to whomever held them, no questions asked. They became a favorite of wealthy individuals who wanted to be discrete, as well as to, well, criminals. Hans Gruber even stormed Nakatomi towers on Christmas Eve to get his hands on them and they are the reason a Chicago cop named Axel Foley traveled to Beverly Hills to seek justice. In 1982, the last bearer bonds were issued, starting the eventual demise of the instrument.
Despite no new issuances for decades, early in my career I dealt with bearer bonds on a bi-weekly basis. Sorting and scanning bearer bond coupons, clipped by some of my firm’s best clients, and redeeming them on their behalf to be deposited in their brokerage account with us. We also used to scour the bond offering sheets specifically for bonds issued in bearer form. Buyers paid quite a premium for these bonds, but for the bearer bond buyer it was money well spent.
Falling into Irrelevancy
Sometime around 2010 regulators decided that banks and brokerages were no longer required to redeem bearer bonds for their clients. Shortly after this decision, many shops stopped the practice altogether. In the hyper efficient age of the computer, there was simply too much labor required to process bearer bonds. That, along with the liability that the bonds discretion potentially carried, made the practice no longer attractive. Outstanding certificates can still be redeemed by mailing them directly to the listed paying agent, along with an IRS form W-9.
Since you could no longer easily redeem your coupons and principal, many longstanding bearer bond buyers abandoned the instruments. Couple that with the length of time since the last issuance (well over 30 years) meaning many of the bonds had been called in and Superstorm Sandy, which destroyed many of the remaining paper certificates at the Depository Trust Company (one of the world’s largest securities depositories) bearer bonds have all but vanished from average life.
It is something I will tell my children about I suppose, and I myself missed the heyday of Bearer bonds. I have two old certificates hanging on my office wall. A reminder of the past, and reminder of one of the nuances that make our market so unique. I will look back fondly on the Bearer Bond, once the coolest fragments of the bond market, now a relic of the past.