It is not the yield, it is the capital gains. A 1% decrease in a bond, can lead to 10% capital gains (gains rise with duration). They are trading cash flows, which are additive over time.
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Who are the idiots buying bonds for 1% interest?
- Thread starter misterno
- Start date
It is not the yield, it is the capital gains. A 1% decrease in a bond, can lead to 10% capital gains (gains rise with duration). They are trading cash flows, which are additive over time.
Quote from Maverick74:
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.
You understand something, but your last sentence can be misleading or reflects a lack of full understanding. The gain is still coming from the yield, because it results from a CHANGE in the yield. Where did you go to school?
Quote from The Big D:
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.
Yes, they can be true, because in a deflation people save more than they borrow. To resist the fall in GDP, the banking system needs a borrower of last resort, and the US is a borrower of last resort. The US will become more credit-worthy not because of budget/etc but because it is needed by the system.
Quote from The Big D:
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.
2 points. It isn't the yeild that is being sought; the spread simply gives the trade the freedom to work.
The money does not need to come from the us fed. Given the options currently available, I would not look for a short in the market anytime soon; rather, I think a buyer of dips will work here. I believe your counter argument that raising rates is impossible at this juncture is correct. Welcome to the lost decade. Should be a blast, if played correctly.
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. [/B]
I think your first sentence is correct, but in your second sentence your thinking seems to be mixed up. Read my previous post.
Quote from tradingjournals:
What are you talking about? The money does not comes from the Fed. It comes from the US Government (Treasury), which is ultimately the tax payers. The Fed does not pay interest, it receives interest.
Yeah, thx for catching that. It has been a long week of trading the us plus the asian markets and I am a little tired, so try not to get your panties too bunched. I think you could catch my meaning, couldn't you? Or do you just need to show the world how smart you are. I am surely impressed!
Quote from gov:
Yeah, thx for catching that. It has been a long week of trading the us plus the asian markets and I am a little tired, so try not to get your panties too bunched. I think you could catch my meaning, couldn't you? Or do you just need to show the world how smart you are. I am surely impressed!
Pls. do not take it negatively, because it was not meant that way. I do not trade asian markets, so I would be interested to learn what you trade/when/etc. Cheers!