Bond Markets

[shindigger]

I read that worldwide nobody wants gubmint bonds, does that mean rates will have to go up by year end?

Ive just registered with Bullion Vault.

They gave me a free gram, that was nice of them

[kilroy]

I read that worldwide nobody wants gubmint bonds, does that mean rates will have to go up by year end?

Ive just registered with Bullion Vault.

They gave me a free gram, that was nice of them

The biggest buyers need to divert funds from external investments into their own economies now.

[interestrateripoff]

To buy the bonds you need money, the only people with money appear to be the central banks who will just print it.

Failure of govt bond sales means the printing presses will get turned on. Money literally does grow on trees if you have the right ink to put on paper.

[sharpe]

I read that worldwide nobody wants gubmint bonds, does that mean rates will have to go up by year end?

Ive just registered with Bullion Vault.

They gave me a free gram, that was nice of them

doesn't it mean that the long term yield will go right up, but the government can still control the short term through buying and selling T bills.

[kilroy]

doesn't it mean that the long term yield will go right up, but the government can still control the short term through buying and selling T bills.

the government is not in control of the short end, which is the problem. Rates in the market hit zero long before the FED cut them. Look at the IRX index (13 week t-bill yield). Yields hit zero because no-one wants to borrow, not because no-one wants to lend.

[Blue Peter]

the government is not in control of the short end, which is the problem. Rates in the market hit zero long before the FED cut them. Look at the IRX index (13 week t-bill yield). Yields hit zero because no-one wants to borrow, not because no-one wants to lend.

I probably don't understand, but wouldn't people have wanted to borrow if rates were a juicy 5% (or 10% or whatever)?

Peter.

Edit: Don't know what I was thinking there!!!!!!!!!!

Edited January 9, 2009 by Blue Peter

[gravity always wins]

The biggest buyers need to divert funds from external investments into their own economies now.

They bought our bonds as long as we bought their tat. We are no longer buying their tat.

[interestrateripoff]

I probably don't understand, but wouldn't people have wanted to borrow if rates were a juicy 5% (or 10% or whatever)?

Peter.

I suspect it's simply supply/demand

If there is demand for borrowing you have limited supply of money therefore the price of borrowing increases.

If you have no demand for borrowing, there is no possible return so the rate would drop to 0% because no one wants the money.

The higher the rate the more demand there is for borrowing you can charge a premium for the money. People at the minute don't want to borrow so the system has gone to 0.

[sharpe]

the government is not in control of the short end, which is the problem. Rates in the market hit zero long before the FED cut them. Look at the IRX index (13 week t-bill yield). Yields hit zero because no-one wants to borrow, not because no-one wants to lend.

surely you mean people cannot borrow? people are going bust left right and centre because they cannot borrow.

i think the central bank can control treasury bills without a real problem - maybe not exactly which is why there is a 0-0.25% spread

[0q0]

The solution is as simple now as it was when a number of us all said this some time ago.#

IRs UP. 5% was low. 5% did the damage. Rates should never have dropped beneath 7%.

The only way out now is to go through the pain, rates have to rise. There are supposedly 7 savers for every borrower. Those who borrowed and still shop until they drop will, as End is Nigh says, have to go cold turkey. Those home"owners" who can't afford their repayments may well be repossessed down the road anyway, they have a small window of opportunity now if not on fixed rates to pay off as much as they can, but the tragedy for those who may well do that is later on when rates inevitably have to go back up they may well lose their home anyway. Why? Because they may have lost their job, low IRs here may not keep their employer going at all, as IRs aren't the issue for most businesses - the issue is poor cashflow planning and inability to borrow now at any rate to put a bridge over their troubled waters.

So, for the sake of what will almost certainly be a failed attempt to rescue the economy, savers and the currency are getting a brutal kicking, just so the government can say "We tried all we could to combat what is a world problem that started in America." The Tory Osborne's mantra remark "Very necessary interest rate cuts" demonstrates that little will change if the Cons get in. Therefore I probably won't even vote when the day comes. In the end, the public are taken for a ride by whoever runs the show, with very few exceptions, it just comes out of our pocket and we're taxed to the grave.

[interestrateripoff]

surely you mean people cannot borrow? people are going bust left right and centre because they cannot borrow.

i think the central bank can control treasury bills without a real problem - maybe not exactly which is why there is a 0-0.25% spread

More of a vicious circle I think.

[sharpe]

I suspect it's simply supply/demand

If there is demand for borrowing you have limited supply of money therefore the price of borrowing increases.

If you have no demand for borrowing, there is no possible return so the rate would drop to 0% because no one wants the money.

The higher the rate the more demand there is for borrowing you can charge a premium for the money. People at the minute don't want to borrow so the system has gone to 0.

the demand for borrowing is currently large - the supply very low. Interest rates should skyrocket (cost of borrowing rise) - not drop to zero, but because the central bank can control short term rates through T-bills this has not happened. it is another example of where trying to fix a market price fails

there is a big demand for borrowing right now

[interestrateripoff]

the demand for borrowing is currently large - the supply very low. Interest rates should skyrocket (cost of borrowing rise) - not drop to zero, but because the central bank can control short term rates through T-bills this has not happened. it is another example of where trying to fix a market price fails

there is a big demand for borrowing right now

Demand for borrowing is large with those who already have debt?

I don't think there is a mass scramble from people with no debt to take on debt. If the debt free where willing to take on debt the collapse wouldn't be as great.

If you aren't going to lend to the only group of people who you would lend to, the debt free, then rates would go to 0%. No demand.

0% is also needed for better debt recovery rates, higher rates just send more people under making your debt losses worse.

0% I would argue is for containment, not that it's going to contain this mess.

[sharpe]

Demand for borrowing is large with those who already have debt?

I don't think there is a mass scramble from people with no debt to take on debt. If the debt free where willing to take on debt the collapse wouldn't be as great.

If you aren't going to lend to the only group of people who you would lend to, the debt free, then rates would go to 0%. No demand.

0% is also needed for better debt recovery rates, higher rates just send more people under making your debt losses worse.

0% I would argue is for containment, not that it's going to contain this mess.

loads of businesses are going bust because they cannot rollover their current debt. it is not an expansion - just keeping it at 2007 levels. loads of people are being rejected for mortgages etc... the 2007 debt levels are probably close to the highest in world history

i think that rates need to be a lot higher. the problem is not a lack of debt, but a lack of savings. we need to encourage saving by rewarding it and discourage reckless debt by boasting the cost. leaving the market to settle interest rates would solve this automatically. sadly the central bank can control the short term rate. as we are seeing in bond auction failures it cannot control the long term rate.

[gravity always wins]

Demand for borrowing is large with those who already have debt?

I don't think there is a mass scramble from people with no debt to take on debt. If the debt free where willing to take on debt the collapse wouldn't be as great.

They want their losses socialised it's Government debt. How much have we and the Americains get to find next year to keep the feckless in their cozy semis and McMansions?

edited to add: bonds the super super bubble.

Edited January 9, 2009 by gravity always wins

[interestrateripoff]

loads of businesses are going bust because they cannot rollover their current debt. it is not an expansion - just keeping it at 2007 levels. loads of people are being rejected for mortgages etc... the 2007 debt levels are probably close to the highest in world history

i think that rates need to be a lot higher. the problem is not a lack of debt, but a lack of savings. we need to encourage saving by rewarding it and discourage reckless debt by boasting the cost. leaving the market to settle interest rates would solve this automatically. sadly the central bank can control the short term rate. as we are seeing in bond auction failures it cannot control the long term rate.

But keeping it at 2007 levels is unrealistic in the current climate. Much of this debt was borrowed again future earnings.

Who can afford to save in this climate? Save now and the economy dies further.

This is catch 22, if we if their are no savings we can't borrow, if everyone spends there money there are no savings.

Higher interest rates would kill everything, 5.25% was too high will all the debt and the US set off it's own destruction with similar high rates.

[kilroy]

surely you mean people cannot borrow? people are going bust left right and centre because they cannot borrow.

i think the central bank can control treasury bills without a real problem - maybe not exactly which is why there is a 0-0.25% spread

It is more a case of if you need to borrow you don't qualify, and if you do qualify, you don't need to borrow. Banks are only lending to good credit risks and lowering rates to try and get them to borrow. Pushing on a string, is the term Friedman used. This is the liquidity trap.

[sharpe]

But keeping it at 2007 levels is unrealistic in the current climate. Much of this debt was borrowed again future earnings.

Who can afford to save in this climate? Save now and the economy dies further.

This is catch 22, if we if their are no savings we can't borrow, if everyone spends there money there are no savings.

Higher interest rates would kill everything, 5.25% was too high will all the debt and the US set off it's own destruction with similar high rates.

too high for who? not me. a lot of inefficient business doing things that people do not need will disappear - that is a good thing. the market left alone would have high rates as lenders demand increased return for the risk. no one wants to lend at 0% so the supply of lending has artificially dried up. the demand is enormous but no one wants to lend at a 0% rate fixed by the central bank.

[shindigger]

loads of businesses are going bust because they cannot rollover their current debt. it is not an expansion - just keeping it at 2007 levels. loads of people are being rejected for mortgages etc... the 2007 debt levels are probably close to the highest in world history

i think that rates need to be a lot higher. the problem is not a lack of debt, but a lack of savings. we need to encourage saving by rewarding it and discourage reckless debt by boasting the cost. leaving the market to settle interest rates would solve this automatically. sadly the central bank can control the short term rate. as we are seeing in bond auction failures it cannot control the long term rate.

So, to summarise, you think rates will HAVE to rise then?

[sharpe]

It is more a case of if you need to borrow you don't qualify, and if you do qualify, you don't need to borrow. Banks are only lending to good credit risks and lowering rates to try and get them to borrow. Pushing on a string, is the term Friedman used. This is the liquidity trap.

or trying to fix the market price of borrowing at 0% when lender actually demand much higher levels to cover their risks

[ParticleMan]

The rates lever influences liquidity directly but only indirectly stokes demand for liquidity (we're beyond the point where setting the rates lever at any positive value will influence demand one iota).

The Fed has entered the same twilight zone that the BOJ did (after first zombifying its own banking sector) - when we speak of "demand for borrowing" and "demand for lending" we need to appreciate that we're actually talking about "demand for further risk-taking endeavour" (the former are merely measures of this) and there is no appetite for this at present and no amount of monetary stimulus will alter this status quo.

It's also necessary to distinguish as to precisely which lender (or borrower) is under consideration and exactly what kind of instrument is being discussed as each behaves differently. There is undoubtedly end-user (final consumer) demand for infinite amounts of borrowing and undoubtedly institutional demand for infinite amounts of lending - and yet still the markets are seized and still institutional capital is being directly recycled into risk-free assets (hint, the nature of what kind of terms final consumers and institutional sources of capital desire could not be further apart).

Negative stimulus (charging savers for holding cash) might break this recycling of reserve liquidity into risk-free (and short-term) instruments (this is EDM's NIRP concept).

Fiscal stimulus (QE and cousins) might, also (the danger here of course is further displacement of demand).

Bill Gross seems to think that the emerging markets will thaw first (I expect the winter freeze to stretch further around the globe and deeper into each nation's own yield curve before this).

I strongly suggest you each analyse his viewpoint before taking this much further.

Edited January 9, 2009 by ParticleMan

[Minderbinder]

I read that worldwide nobody wants gubmint bonds, does that mean rates will have to go up by year end?

The opposite of this is currently the case. Everyone want government bonds (particularly US treasuries) and so their prices are high and yileds are at historic lows.

Interest rates will remain low while that is the case. If the sentiment reverses and noone wants government bonds then interest rates will rise.

The Fed (and maybe soon the BoE) have declared their intent and started buying government bonds in order to maintain low interest rates indefinitely.

[sharpe]

The rates lever influences liquidity directly but only indirectly stokes demand for liquidity (we're beyond the point where setting the rates lever at any positive value will influence demand one iota).

The Fed has entered the same twilight zone that the BOJ did (after first zombifying its own banking sector) - when we speak of "demand for borrowing" and "demand for lending" we need to appreciate that we're actually talking about "demand for further risk-taking endeavour" (the former are merely measures of this) and there is no appetite for this at present and no amount of monetary stimulus will alter this status quo.

It's also necessary to distinguish as to precisely which lender (or borrower) is under consideration and exactly what kind of instrument is being discussed as each behaves differently. There is undoubtedly end-user (final consumer) demand for infinite amounts of borrowing and undoubtedly infinite amounts of institutional demand for infinite amounts of lending - and yet still the markets are seized and still institutional capital is being directly recycled into risk-free assets (hint, the nature of what kind of terms final consumers and institutional sources of capital desire could not be further apart).

Negative stimulus (charging savers for holding cash) might break this recycling of reserve liquidity into risk-free (and short-term) instruments (this is EDM's NIRP concept).

Fiscal stimulus (QE and cousins) might, also (the danger here of course is further displacement of demand).

Bill Gross seems to think that the emerging markets will thaw first (I expect the winter freeze to stretch further around the globe and deeper into each nation's own yield curve first).

I strongly suggest you each analyse his viewpoint before taking this much further.

Thanks for this - i will check out the view of Mr Gross.

What about letting the market decide interest rates by itself! This would raise rates to a level where lenders could get a fair return and borrowers would have to seriously consider their business plans before borrowing.

we are in a liquidity trap because no one wants to lend at 0%. raising this to 10% say (through the market) would encourage saving and give banks something to lend with

[kilroy]

Thanks for this - i will check out the view of Mr Gross.

What about letting the market decide interest rates by itself! This would raise rates to a level where lenders could get a fair return and borrowers would have to seriously consider their business plans before borrowing.

we are in a liquidity trap because no one wants to lend at 0%. raising this to 10% say (through the market) would encourage saving and give banks something to lend with

but borrowers can't afford 10%, hell, they can't even afford 5%!

[ParticleMan]

What about letting the market decide interest rates by itself! This would raise rates to a level where lenders could get a fair return and borrowers would have to seriously consider their business plans before borrowing.

Again we need to be quite specific if we are to have a sensible conversation.

The market does discover risk premia - I think we should trivially be able to agree this without proceeding.

Reserves set the risk-free rate (the market cannot guarantee par value - only the taxpayer can do this).

The difference between market and reserve opinion on growth outlook (opinion as to whether or not the Reserve's liquidity goals will be met) is expressed both in exchange rate futures as well as treasuries yield.

In short - the market can only guess at over- or under-shoot and critically it is and does.

The market cannot set the taxpayer's economic growth target (and even the reserves can only forecast this) - this seems a nonsensical concept to me, but I'm open to further input.