http://www.businessweek.com/news/20...-strengthening-debt-rally-credit-markets.html
Anybody can explain?
Anybody can explain?
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Who are the idiots buying bonds for 1% interest?
- Thread starter misterno
- Start date
Banks.
1) It's a "momentum play". The trend keeps feeding on itself.Quote from misterno:
What am I missing here?
2) A "small" yield is better than no yield.
3) Flight to quality.
4) There can be a short squeeze taking place......all of the things that tend to occur near longer-term peaks in the bond market. :eek:
Quote from misterno:
My checking account pays me 3.5%
I still don't understand why anyone or any fund or any bank would buy a bond that pays 1%
What am I missing here?
They are not earning 1%, they are making 5% to 10%. They are not buying them for the coupon, they are buying them for the price appreciation. Treasury bond funds are up 10% to 30% the last year. That is not coming from the yield.
Quote from gov:
It's simple. You are missing the ability to borrow money at 1/2 % (or less). This ability makes this trade a no-brainer.
No it doesn't - you may be able to borrow money for the next 90 days at 1/2% or whatever, but you can't do it guaranteed for 1-5 years. So you're assuming huge interest rate risks by doing so. It's not a no-brainer by any means.
I'd say the most reasonable analysis is that buying any 1-5 year T-bond right now is a bet on the parlay of two things:
1) a deflationary recession
2) the US remains credit-worthy
Personally, I don't see how 1) and 2) can both be true. So eventually I think it makes sense to short the 5-year. But we may not be at the right spot yet.
The counter-argument would be that as more US and world financial institutions take on more interest rate risk in the form of very low yield long bond positions, it becomes effectively impossible for the government to raise rates without destroying those institutions. Thus it may paradoxically be necessary to CREATE a deflationary recession to avoid a banking crisis.