U.S. Said to Probe Possible Rigging in Agency Bond Market

DOJ Probe Into Agency Bond Market Gains Momentum
  • Inquiry into multitrillion-dollar SSA market gaining momentum
  • Justice Department asking if traders coordinated bond quotes

The U.S. Justice Department is examining possible manipulation in the trading of agency bonds -- $9 trillion or more in debt issued by the likes of German states, government entities and the World Bank -- according to three people familiar with the matter.

The inquiry into the market for supranational, sub-sovereign and agency bonds, or SSAs, is gathering momentum as the U.S. investigates whether traders violated fraud statutes or antitrust laws that prohibit collusion, said the people, who asked not to be named because details of the investigation aren’t public.

The officials are focusing on activity by London-based traders primarily before 2014, according to one of the people. Among the things investigators are scrutinizing, the person said, was whether the traders at different banks coordinated with each other before deciding who would offer price quotes to potential buyers and sellers.

Prosecutors have obtained transcripts of online chat-room conversations indicating possible misconduct and have contacted banks, asking them to delve further into the behavior, the person said.

The inquiry is the latest indication that U.S. prosecutors are extending the scope of their scrutiny on global banks’ trading operations after reaching multibillion dollar settlements related to their attempts to manipulate interest-rate benchmarks and currency markets. Relative to those matters, the possible wrongdoing in the SSA market appears to be on smaller scale, at least in the inquiry’s early stages, one of the people said.

Peter Carr, a Justice Department spokesman, declined to comment.

While there’s variation on how the SSA market is defined, it generally includes international development organizations, government-sponsored entities and some sovereign debt. Depending on the universe, the market could range from $9 trillion to $15 trillion, according to data compiled by Bloomberg.

The year’s biggest issuers of the securities, according to the data, include the World Bank and the European Investment Bank. Fannie Mae and Freddie Mac are also big issuers of agency bonds -- corporate debt that is distinct from the mortgage-backed securities they also issue.

The bonds generally have high credit ratings because of explicit or implicit guarantees that back them. 

It’s not clear which banks the U.S. may be investigating, or which agencies’ bonds may have been involved. There was no indication that the U.S. is looking into any wrongdoing by issuers.

Scrutiny of the market follows guilty pleas earlier this year by a group of the world’s biggest banks for conspiring to manipulate currency trading. Traders at Citigroup Inc., Barclays Plc, JPMorgan Chase & Co., and Royal Bank of Scotland Group Plc used electronic chat rooms to try to fix prices for dollars and euros.

The banks agreed to cooperate with investigators and to identify possible wrongdoing throughout their operations. The government is continuing to look into possible collusion in gold and silver markets and in trading of U.S. Treasuries, people familiar with the matter have said.

After the resolution of the currency cases, the Justice Department introduced a policy in September aimed at targeting individuals in corporate fraud investigations. Since then, the Justice Department hasn’t resolved any criminal cases with banks. Under the policy, companies must turn over employees if they hope to win reduced penalties and prosecutors are required to explain why cases against individuals couldn’t be made by the time the statute of limitations expires.

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