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Increased tax, higher unemployment & economic difficulties

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dealtn
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Re: Increased tax, higher unemployment & economic difficulties

#348035

Postby dealtn » October 15th, 2020, 3:56 pm

Snorvey wrote:Then again there's the 6% 2028. One of my favourite bonds. Been a benchmark 30 year but very reluctant 10 year, given its coupon. The youngsters couldn't believe it was real!


Are you, like, a bondspotter or something?



Nope, but its high coupon and the fact it didn't behave like its neighbours made it fun. Many a youngster would have learnt the difference between maturity and duration with that Gilt. The back office "newbies" also commented on how it was possible for the book to have received over £20mio "interest" overnight from a single bond, or why the book had lost £20mio in its bond valuation.

Maybe you just had to be there, but I dispute the "anorak" tag.

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Re: Increased tax, higher unemployment & economic difficulties

#348104

Postby odysseus2000 » October 15th, 2020, 9:11 pm

SalvorHardin
When comparing different countries interest rates and the premiums demanded by investors, look at the redemption yield not the running yield. If you look at a US Treasury Bond that was issued in the second half of 2007, I would expect that there would be a similar difference in interest rates between it and today's 10 year US Treasury rate to that between Treasury 4.75% 2030 today and back in 2007.


Yes, but the question was why is the UK 10 year bond paying more interest than the US bond as measured in the market today.

What I was trying to show was that the UK 10 year is trading well above par and will involve a significant loss for anyone who buys it and holds to maturity, whereas the US one is trading below par and will produce a tiny gain for buyer who holds till maturity.

In essence, as I understand it, the UK has not issued a recent bond and is instead relying on an older bond that pays a larger coupon, whereas the US has issued more recent bonds.

At this times someone who buys the UK 10 year gets the larger coupon, but on a bond that he/she has to pay well over par to buy. Anyone doing this is presumably expecting UK interest rates to go even lower causing the bond to rise in price.

Or to answer the original question is a qualitative manner, the quoted yields on the US and UK 10 years are heavily influenced by history and are not directly comparable. Were it possible for the UK treasury to call (retire) the current 10 year I imagine the Treasury would have done so and issued a new bond that has a coupon similar to the US one. As things are the UK 10 year coupon is well above what it needs to be and that difference is reflected in the market price being well above par. Investors who correctly predicted that interest rates would fall have done very well out of holding the UK 10 year bond, whereas the UK Treasury has had to pay out more coupon than would be the case if they could have culled the bond and issued a substitute.

If you think this is wrong, please post why.

Regards,

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Re: Increased tax, higher unemployment & economic difficulties

#348116

Postby SalvorHardin » October 15th, 2020, 10:41 pm

odysseus2000 wrote:Yes, but the question was why is the UK 10 year bond paying more interest than the US bond as measured in the market today.

Because the 2030 UK gilt was issued at a time when interest rates were much higher. So it's will have a higher coupon than if a new 10 year gilt was issued today.

If the UK Treasury issued a 10 year gilt today at par it would have a coupon of something like 0.2%, since the 2030 gilt has a redemption yield of about 0.18%. The 10 year US treasury redemption yield is higher, at about 0.7%.

Investors' true return is the redemption yield, not the coupon. Most of what owners of the 2030 gilt get in the form of higher interest payments will be lost over time because of the capital loss when redeemed in December 2030.

The Treasury could buy back all of the 2030 gilt and then "reissue" a Treasury 0.2% 2030 gilt at par. They'd have to pay a bit of a premium to the current price to do this because this huge demand would push the price up. What the treasury would save in paying a lower coupon (0.2% vs. 4.75%) for 10 years, it would lose in having to pay at least £1.45 for each £1 that would otherwise be paid in December 2030.

The situation would be similar with a 2030 maturity US Treasury bond issued in 2007. It would have been issued with a much higher interest rate than today's 10 year bond. There may be such a bond out there (I haven't looked).

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Re: Increased tax, higher unemployment & economic difficulties

#348198

Postby dealtn » October 16th, 2020, 10:43 am

odysseus2000 wrote:
SalvorHardin
When comparing different countries interest rates and the premiums demanded by investors, look at the redemption yield not the running yield. If you look at a US Treasury Bond that was issued in the second half of 2007, I would expect that there would be a similar difference in interest rates between it and today's 10 year US Treasury rate to that between Treasury 4.75% 2030 today and back in 2007.


Yes, but the question was why is the UK 10 year bond paying more interest than the US bond as measured in the market today.

What I was trying to show was that the UK 10 year is trading well above par and will involve a significant loss for anyone who buys it and holds to maturity, whereas the US one is trading below par and will produce a tiny gain for buyer who holds till maturity.

In essence, as I understand it, the UK has not issued a recent bond and is instead relying on an older bond that pays a larger coupon, whereas the US has issued more recent bonds.

At this times someone who buys the UK 10 year gets the larger coupon, but on a bond that he/she has to pay well over par to buy. Anyone doing this is presumably expecting UK interest rates to go even lower causing the bond to rise in price.

Or to answer the original question is a qualitative manner, the quoted yields on the US and UK 10 years are heavily influenced by history and are not directly comparable. Were it possible for the UK treasury to call (retire) the current 10 year I imagine the Treasury would have done so and issued a new bond that has a coupon similar to the US one. As things are the UK 10 year coupon is well above what it needs to be and that difference is reflected in the market price being well above par. Investors who correctly predicted that interest rates would fall have done very well out of holding the UK 10 year bond, whereas the UK Treasury has had to pay out more coupon than would be the case if they could have culled the bond and issued a substitute.

If you think this is wrong, please post why.

Regards,


You are wrong on so many levels and really need to understand Bonds, and their pricing to even have a conversation like this.

What makes you think the UK hasn't issued a recent bond? Just over a week ago it issued a 10 year Gilt. Its coupon is 0.375%.

The UK is not "relying" on an older bond. What kind of reliance is that? You imagine it issued a 30 year bond 20 years ago and has been sitting on (some of) that cash for expenditure 20 years later?

It has issued £24bio of Gilts alone this month, and we are only half way through the month.

Buyers of the Gilt you mention are no more likely to want interest rates to go down than buyers of other Gilts, it really doesn't work like that.

It is absolutely possible for the UK government to "retire" that bond, there is no call option but they can buy it in the market, but have no reason to. There is no "imagine" they would have done. There are very few reasons for a government to do this, it has been done rarely. The high coupon isn't the reason.

Please go away and do some research on bonds, and even some simple bond maths.

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Re: Increased tax, higher unemployment & economic difficulties

#348203

Postby Dod101 » October 16th, 2020, 10:52 am

odysseus seems to be living on another planet. Or are both sides talking about something else altogether?

Dod

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Re: Increased tax, higher unemployment & economic difficulties

#348230

Postby AsleepInYorkshire » October 16th, 2020, 12:09 pm

We're all Fools aren't we?

How gilts work and why they matter

I know very little about bonds and guilts which I would humbly suggest makes me a great Fool :roll:

AiY

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Re: Increased tax, higher unemployment & economic difficulties

#348249

Postby odysseus2000 » October 16th, 2020, 1:09 pm

dealtn
You are wrong on so many levels and really need to understand Bonds, and their pricing to even have a conversation like this.

What makes you think the UK hasn't issued a recent bond? Just over a week ago it issued a 10 year Gilt. Its coupon is 0.375%.

The UK is not "relying" on an older bond. What kind of reliance is that? You imagine it issued a 30 year bond 20 years ago and has been sitting on (some of) that cash for expenditure 20 years later?

It has issued £24bio of Gilts alone this month, and we are only half way through the month.

Buyers of the Gilt you mention are no more likely to want interest rates to go down than buyers of other Gilts, it really doesn't work like that.

It is absolutely possible for the UK government to "retire" that bond, there is no call option but they can buy it in the market, but have no reason to. There is no "imagine" they would have done. There are very few reasons for a government to do this, it has been done rarely. The high coupon isn't the reason.

Please go away and do some research on bonds, and even some simple bond maths.


I was trying to answer the original question and the bond figure being quoted was the one referred to.

Yes, there are many other bonds, yes there are many other considerations, but it seems no one else wants to answer the original question and I was focusing on that particular bond because that was the one that was brought up in the comparison of the US and UK bonds.

Also with regard to buyers of gilts not wanting interest rates to go down, the buyers of the 30 year bond who bought it around par were more than pleased to have interest rates go down as this has provided the large capital gain.

Moreover, if the Treasury had any conviction in the direction of interest rates they would have bought back the 30 year bond long before it reached it current price, saving the coupon as they could have got the same amount of cash via a much lower coupon.

If I was managing debt for a private borrower, I would have bought the bond back years ago and re-issued to reduce interest payments. This kind of thing happens regularly in companies.

Regards,

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Re: Increased tax, higher unemployment & economic difficulties

#348267

Postby dealtn » October 16th, 2020, 2:14 pm

odysseus2000 wrote:
dealtn
You are wrong on so many levels and really need to understand Bonds, and their pricing to even have a conversation like this.

What makes you think the UK hasn't issued a recent bond? Just over a week ago it issued a 10 year Gilt. Its coupon is 0.375%.

The UK is not "relying" on an older bond. What kind of reliance is that? You imagine it issued a 30 year bond 20 years ago and has been sitting on (some of) that cash for expenditure 20 years later?

It has issued £24bio of Gilts alone this month, and we are only half way through the month.

Buyers of the Gilt you mention are no more likely to want interest rates to go down than buyers of other Gilts, it really doesn't work like that.

It is absolutely possible for the UK government to "retire" that bond, there is no call option but they can buy it in the market, but have no reason to. There is no "imagine" they would have done. There are very few reasons for a government to do this, it has been done rarely. The high coupon isn't the reason.

Please go away and do some research on bonds, and even some simple bond maths.


I was trying to answer the original question and the bond figure being quoted was the one referred to.

Yes, there are many other bonds, yes there are many other considerations, but it seems no one else wants to answer the original question and I was focusing on that particular bond because that was the one that was brought up in the comparison of the US and UK bonds.

Also with regard to buyers of gilts not wanting interest rates to go down, the buyers of the 30 year bond who bought it around par were more than pleased to have interest rates go down as this has provided the large capital gain.

Moreover, if the Treasury had any conviction in the direction of interest rates they would have bought back the 30 year bond long before it reached it current price, saving the coupon as they could have got the same amount of cash via a much lower coupon.

If I was managing debt for a private borrower, I would have bought the bond back years ago and re-issued to reduce interest payments. This kind of thing happens regularly in companies.

Regards,


What original question?

The only person who brought up the bond was you! The bond figure quoted was by you!

I could have easily quoted a range of current 10 year maturity US issues with coupons over 1%, up to 5% possibly, I haven't checked. I could have then compared that with coupons on UK issues all below 1% and made exactly the same, but opposite, (and wrong) conclusion that you did, but favouring UK bonds.

It really, no honestly really, doesn't work like that.

When would you have bought back the UK bond you refer to exactly? Where would you have got the money from, issuing a new bond presumably. Would you have done this at par, and with what coupon. What would your interest saving be? For the same maturity you would have required to issue many more bonds, you wouldn't save any money.

Do the bond maths and explain it all to us please. After 25 years pricing and trading government debt in the City I am sure I am ready to be educated.

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Re: Increased tax, higher unemployment & economic difficulties

#348271

Postby odysseus2000 » October 16th, 2020, 2:36 pm

dealtn
What original question?

The only person who brought up the bond was you! The bond figure quoted was by you!

I could have easily quoted a range of current 10 year maturity US issues with coupons over 1%, up to 5% possibly, I haven't checked. I could have then compared that with coupons on UK issues all below 1% and made exactly the same, but opposite, (and wrong) conclusion that you did, but favouring UK bonds.

It really, no honestly really, doesn't work like that.

When would you have bought back the UK bond you refer to exactly? Where would you have got the money from, issuing a new bond presumably. Would you have done this at par, and with what coupon. What would your interest saving be? For the same maturity you would have required to issue many more bonds, you wouldn't save any money.

Do the bond maths and explain it all to us please. After 25 years pricing and trading government debt in the City I am sure I am ready to be educated.


The question from MotorCycleBoy, see thread.

Have you never heard of re-financing?

Regards,

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Re: Increased tax, higher unemployment & economic difficulties

#348275

Postby dealtn » October 16th, 2020, 2:44 pm

odysseus2000 wrote:
dealtn
What original question?

The only person who brought up the bond was you! The bond figure quoted was by you!

I could have easily quoted a range of current 10 year maturity US issues with coupons over 1%, up to 5% possibly, I haven't checked. I could have then compared that with coupons on UK issues all below 1% and made exactly the same, but opposite, (and wrong) conclusion that you did, but favouring UK bonds.

It really, no honestly really, doesn't work like that.

When would you have bought back the UK bond you refer to exactly? Where would you have got the money from, issuing a new bond presumably. Would you have done this at par, and with what coupon. What would your interest saving be? For the same maturity you would have required to issue many more bonds, you wouldn't save any money.

Do the bond maths and explain it all to us please. After 25 years pricing and trading government debt in the City I am sure I am ready to be educated.


The question from MotorCycleBoy, see thread.

Have you never heard of re-financing?

Regards,


"The thing I dont get in this world of QE for all, and globally connected money markets, is why, for example, US debt has higher yield than the UK's."

Presumably this one?

You don't answer that question but introduce a pair of bonds and talk about their coupons, not yields. I have tried, as have others, to point out to you that what you are showing are not yields, and not relevant to that question.

You can quote alternative pairs that have a high US coupon and a low UK one and draw the complete opposite conclusion.

Yes I have heard of re-financing. I was involved in many over the years I worked in the City. So please educate me, and anybody else interested, on how you would re-finance the UK 10 year bond either now, or at any time in its 20 year history to save the money you are claiming.

Show me the maths.

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Re: Increased tax, higher unemployment & economic difficulties

#348382

Postby odysseus2000 » October 16th, 2020, 9:21 pm

Sticking to the bond in question, it has a coupon of 4.75 and trades at 145.45.

Over 10 years the bond pays out to the owner 4.75x10 =47.5 and at the end of 10 years it is bought back for par of 100. The cost to the issuer is therefore 100+47.5 =147.50.

Assuming no frictional costs then the Treasury could buy the bond now for 145.45 with a minimal saving of 147.5 - 145.45 = 2.05.

If a new bond at the equivalent of the US yield was launched at a coupon of 0.63, then over 10 years it would cost 0.63x10 =6.30.

Hence at current levels buying back the bond would incur an additional cost after 10 years of 6.30-2.05 = 4.25.

I was making the point that to have retired the bond earlier when it was much cheaper would have saved on the coupon payments.

However, bonds are traded instruments and if interest rates were to rise the price of the bond would fall and at the same time the coupon on the replacement would have to increase.

The whole bond trading game is about making bets on future interest rates and buying or selling according to what the investor considers most probable outcomes.

In the current regime of low interest rates a lot of high coupon debt issued by corporations has been bought back and replace with lower coupon debt to save company cash which is the point I was making about re-financing.

Regards,

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Re: Increased tax, higher unemployment & economic difficulties

#348420

Postby dealtn » October 17th, 2020, 8:45 am

odysseus2000 wrote:Sticking to the bond in question, it has a coupon of 4.75 and trades at 145.45.

Over 10 years the bond pays out to the owner 4.75x10 =47.5 and at the end of 10 years it is bought back for par of 100. The cost to the issuer is therefore 100+47.5 =147.50.

Assuming no frictional costs then the Treasury could buy the bond now for 145.45 with a minimal saving of 147.5 - 145.45 = 2.05.

If a new bond at the equivalent of the US yield was launched at a coupon of 0.63, then over 10 years it would cost 0.63x10 =6.30.

Hence at current levels buying back the bond would incur an additional cost after 10 years of 6.30-2.05 = 4.25.

I was making the point that to have retired the bond earlier when it was much cheaper would have saved on the coupon payments.

...

In the current regime of low interest rates a lot of high coupon debt issued by corporations has been bought back and replace with lower coupon debt to save company cash which is the point I was making about re-financing.

Regards,


And as you have just demonstrated buying back the bonds at a premium to par involves a (huge in this case) cost that needs to be funded. There is no free lunch in bond refinancing.

Refinancing takes place, and usually involves fresh capital, and different capital instruments, and often extending the duration of the debt. You won't get situations where you re-finance like-for-like and get a saving.

In your above example there is no need to issue the replacement with a 0.63% coupon. There was a 10 year Gilt issued last week, just above par, with a 0.375% coupon, as was already pointed out to you. That reduces your calculated "additional cost".

In going back to the "original question". 10 year government bond yields can be thought of as the "average" rate short term government debt is likely to be over the path of that 10 years. In the same way you might invest in a 1 month savings account and roll over 120 times, or (if available) invest in a 10 year fixed rate account. In addition, because the future is uncertain, tying up your money for 10 years is risky. Lots could happen. You would probably demand a "premium" to do so. Even the US government requires a premium in its term structure. You also want a small credit premium, as they might go bankrupt, and be able to repay (although this is tiny in the case of the US - especially in their own currency). A larger one would be demanded for others, such as Greece/Argentina etc. Then they will be a liquidity premium, which again is tiny as both US and UK bonds trade freely, with minimal cost and only extremely. rarely is it difficult or illiquid to trade.

This "term structure" applies to all maturities along the curve, which in the case of the UK is 50+ years, the US closer to 30.

10 year US trades > 10 year UK at the moment, some of which is because the short term rate is marginally higher Fed Funds are up to 0.25%, against UK Base Rate at 0.1%. More is due to expectations that the path of this short rate in the US will rise earlier, and further, than its UK equivalent.

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Re: Increased tax, higher unemployment & economic difficulties

#348481

Postby odysseus2000 » October 17th, 2020, 2:55 pm

dealtn
And as you have just demonstrated buying back the bonds at a premium to par involves a (huge in this case) cost that needs to be funded. There is no free lunch in bond refinancing.

Refinancing takes place, and usually involves fresh capital, and different capital instruments, and often extending the duration of the debt. You won't get situations where you re-finance like-for-like and get a saving.

In your above example there is no need to issue the replacement with a 0.63% coupon. There was a 10 year Gilt issued last week, just above par, with a 0.375% coupon, as was already pointed out to you. That reduces your calculated "additional cost".

In going back to the "original question". 10 year government bond yields can be thought of as the "average" rate short term government debt is likely to be over the path of that 10 years. In the same way you might invest in a 1 month savings account and roll over 120 times, or (if available) invest in a 10 year fixed rate account. In addition, because the future is uncertain, tying up your money for 10 years is risky. Lots could happen. You would probably demand a "premium" to do so. Even the US government requires a premium in its term structure. You also want a small credit premium, as they might go bankrupt, and be able to repay (although this is tiny in the case of the US - especially in their own currency). A larger one would be demanded for others, such as Greece/Argentina etc. Then they will be a liquidity premium, which again is tiny as both US and UK bonds trade freely, with minimal cost and only extremely. rarely is it difficult or illiquid to trade.

This "term structure" applies to all maturities along the curve, which in the case of the UK is 50+ years, the US closer to 30.

10 year US trades > 10 year UK at the moment, some of which is because the short term rate is marginally higher Fed Funds are up to 0.25%, against UK Base Rate at 0.1%. More is due to expectations that the path of this short rate in the US will rise earlier, and further, than its UK equivalent.


Great answer!

Thank you!

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Re: Increased tax, higher unemployment & economic difficulties

#349267

Postby TheMotorcycleBoy » October 20th, 2020, 5:42 pm

Jeez. I take a few days off and return to this thread to explain to Ody that the yields I quoted here are more than likely the average YTMs of various treasuries and gilts of varying issues, and all of you lot have run away with yourselves! :lol:

Anyway I see dealtn has elaborated somewhat on my words above in here with this

dealtn wrote:In going back to the "original question". 10 year government bond yields can be thought of as the "average" rate short term government debt is likely to be over the path of that 10 years. In the same way you might invest in a 1 month savings account and roll over 120 times, or (if available) invest in a 10 year fixed rate account. In addition, because the future is uncertain, tying up your money for 10 years is risky. Lots could happen. You would probably demand a "premium" to do so. Even the US government requires a premium in its term structure. You also want a small credit premium, as they might go bankrupt, and be able to repay (although this is tiny in the case of the US - especially in their own currency). A larger one would be demanded for others, such as Greece/Argentina etc. Then they will be a liquidity premium, which again is tiny as both US and UK bonds trade freely, with minimal cost and only extremely. rarely is it difficult or illiquid to trade.

This "term structure" applies to all maturities along the curve, which in the case of the UK is 50+ years, the US closer to 30.

Out of interest, today reuters, are stating:

US 10 Year Treasury Yield +0.796%
UK 10 Year Yield +0.19%

In other words, investors are demanding almost 4x higher return from US debt, and those investors can easily move around too, those instruments being highly liquid. Which given Ody's earlier assertion of the US being the "most powerful nation on the planet", I find odd.

10 year US trades > 10 year UK at the moment, some of which is because the short term rate is marginally higher Fed Funds are up to 0.25%, against UK Base Rate at 0.1%. More is due to expectations that the path of this short rate in the US will rise earlier, and further, than its UK equivalent.

Goes to part of the way towards an explanation. Is the current weakness (i.e. the USD/GBP, USD/EUR) of the $ another?

Matt

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Re: Increased tax, higher unemployment & economic difficulties

#349323

Postby odysseus2000 » October 20th, 2020, 8:37 pm

In other words, investors are demanding almost 4x higher return from US debt, and those investors can easily move around too, those instruments being highly liquid. Which given Ody's earlier assertion of the US being the "most powerful nation on the planet", I find odd.

dealtn10 year US trades > 10 year UK at the moment, some of which is because the short term rate is marginally higher Fed Funds are up to 0.25%, against UK Base Rate at 0.1%. More is due to expectations that the path of this short rate in the US will rise earlier, and further, than its UK equivalent.


Goes to part of the way towards an explanation. Is the current weakness (i.e. the USD/GBP, USD/EUR) of the $ another?

Matt


Bonds are heavily traded, so if US rates do raise then bond prices fall and traders will be attempting to be ahead of the curve.

US Fed has been more hawkish on rates than the BOE and if Trump wins and retains Powell, the odds on that Fed may again raise rates is good. If Biden wins who knows who will be appointed in place of Powell so its harder to game.

Nevertheless if you want your money back which is what is often high on bond owners minds, it is, at least imho, more certain from the US than the UK given what might happen over Brexit, although again imho I doubt much will happen with Brexit, even though it can.

The interest rates though are more reflecting bond investors trading thoughts than security of return as a default by the US or the UK is very unlikely.

Regards,

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Re: Increased tax, higher unemployment & economic difficulties

#349393

Postby TheMotorcycleBoy » October 21st, 2020, 4:44 am

odysseus2000 wrote:
In other words, investors are demanding almost 4x higher return from US debt, and those investors can easily move around too, those instruments being highly liquid. Which given Ody's earlier assertion of the US being the "most powerful nation on the planet", I find odd.

dealtn10 year US trades > 10 year UK at the moment, some of which is because the short term rate is marginally higher Fed Funds are up to 0.25%, against UK Base Rate at 0.1%. More is due to expectations that the path of this short rate in the US will rise earlier, and further, than its UK equivalent.


Goes to part of the way towards an explanation. Is the current weakness (i.e. the USD/GBP, USD/EUR) of the $ another?

Matt


Bonds are heavily traded, so if US rates do raise then bond prices fall and traders will be attempting to be ahead of the curve.

US Fed has been more hawkish on rates than the BOE and if Trump wins and retains Powell, the odds on that Fed may again raise rates is good. If Biden wins who knows who will be appointed in place of Powell so its harder to game.

Actually in recent statements Powell has stated he will be fairly lenient on inflation if and when it happens, suggesting that your point re. rate raises to, at least in the medium term, to be incorrect.

https://www.cnbc.com/2020/08/27/powell- ... onger.html

Nevertheless if you want your money back which is what is often high on bond owners minds, it is, at least imho, more certain from the US than the UK given what might happen over Brexit, although again imho I doubt much will happen with Brexit, even though it can.

And the yields on the debt suggest that holders of US treasuries currently desired almost 4x as much risk compensation (i.e. the yield) than they do of UK debt. Which suggests that they are less certain of getting their money back if they hold the US debt!

Which was my point from earlier on.

Matt

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Re: Increased tax, higher unemployment & economic difficulties

#349428

Postby odysseus2000 » October 21st, 2020, 8:40 am

Actually in recent statements Powell has stated he will be fairly lenient on inflation if and when it happens, suggesting that your point re. rate raises to, at least in the medium term, to be incorrect.

https://www.cnbc.com/2020/08/27/powell- ... onger.html

Nevertheless if you want your money back which is what is often high on bond owners minds, it is, at least imho, more certain from the US than the UK given what might happen over Brexit, although again imho I doubt much will happen with Brexit, even though it can.

And the yields on the debt suggest that holders of US treasuries currently desired almost 4x as much risk compensation (i.e. the yield) than they do of UK debt. Which suggests that they are less certain of getting their money back if they hold the US debt!

Which was my point from earlier on.

Matt


Chair people of the FED say all manner of things. Greenspan went on record saying that he was always worried about being too clear. The one thing we do know about Powell is that he has raised rates when there was no obvious reason to raise. His statement was that he wanted rates up so that in an emergency he could bring them down again. Along came Covid ...

The yield on the US treasuries is all about where bond investors think rates are going than about worries over getting their money back. It is currently inconceivable that the US will default. It is also almost inconceivable that the UK will default, but with Brexit there is more uncertainty than in the US.

My original statement that investors would more trust the FED than the BOE is not compromised because some rates happen to be better for US bond holders than UK bond holders. As I understand this some comes from when Powell started his rate raising and there is still a perception that if Covid gets better that he will again tinker with rates, if he is still in the job, i.e. if Trump wins and keeps him. If Biden wins he is almost certainly gone and the whole bond market predictive machine will gear up to what they expect the new person to do.

Regards,

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Re: Increased tax, higher unemployment & economic difficulties

#349510

Postby TheMotorcycleBoy » October 21st, 2020, 11:43 am

odysseus2000 wrote:....when Powell started his rate raising and there is still a perception that if Covid gets better that he will again tinker with rates, if he is still in the job..............If Biden wins he is almost certainly gone and the whole bond market predictive machine will gear up to what they expect the new person to do.

OOI, what makes you say that?

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Re: Increased tax, higher unemployment & economic difficulties

#349514

Postby TheMotorcycleBoy » October 21st, 2020, 11:47 am

Column: Savings stash squares brutal second-wave rescue costs

The commensurate surge in central bank bond buying is clearly the main reason financial markets haven’t run scared and benchmark 10-year borrowing rates remain near record lows of less than 1% stateside and below zero in much of the euro zone.

And on that, the IMF estimates the European Central Bank (ECB) has bought as much as 71% of all euro government debt sold since February while the U.S. Federal Reserve has snapped up 57% of all Treasury debt issued since then.

The question for the public at large, however, is how long can governments keep this up and what’s the payback?

Part of the answer lies in a circular flow involving the mass build-up of precautionary household savings during pandemic lockdowns and beyond, and whether, or how quickly, they get run down and spent.

Unlike the money supply implosion that accompanied the banking crash and credit crunch 12 years ago, the opposite happened this year as governments pre-empted their own shutdowns with a flood of income support, lending and credit guarantees while firms rushed to borrow and build cash buffers.
....
....
Money printing is only inflationary if people and companies spend it, Nielsen wrote, and there’s really no realistic prospect of the private savings glut becoming inflationary even if spent in a very short period.

“It’s an output gap story. The huge expansion in private savings in recent months illustrates this, so the fiscal expansion is basically no more than an exercise in propping up demand as the private sector retrenches.”
....
....
What’s more, if the virus dissipates, consumer spending re-emerges and those precautionary savings are run down quickly, it will most likely be an environment where deficits and debt sales shrink too and central bank balance sheets flatten out.

Myriad questions and longer-term conundrums persist.

Can debts rise endlessly if inflation never emerges? What happens to sovereign credit ratings in that scenario? What happens if, or when, inflation does re-emerge?

Investors at Columbia Threadneedle, for example, think caution is still warranted over the “political will” in the euro zone to manage the rising debt stock of countries such as Italy and Spain which have debt-to-GDP ratios above 100% but no domestic central bank.


Seemed vaguely relevant, from https://uk.reuters.com/article/uk-globa ... KKBN2760MY

Matt

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Re: Increased tax, higher unemployment & economic difficulties

#349517

Postby odysseus2000 » October 21st, 2020, 12:01 pm

TheMotorcycleBoy wrote:
odysseus2000 wrote:....when Powell started his rate raising and there is still a perception that if Covid gets better that he will again tinker with rates, if he is still in the job..............If Biden wins he is almost certainly gone and the whole bond market predictive machine will gear up to what they expect the new person to do.

OOI, what makes you say that?


New presidents usually sweep house, especially at the FED.

Trump discarded Yellen and installed Powell and came to regret it enormously, calling his rate rises the wrong policy and crazy.

I have never had any idea what will happen at this sort of level in the US. Sometimes the folk on Washington Week or what ever the PBS program is now called, call these things very accurately, but I don't mess with bonds and am only interested in the general Fed picture. Yellen in my view was better for equities, but with Powell it has been my best year in US equities since the great moves around 2000, that case, as now, driven mostly by secular growth rather than fiscal policy.

Regards,


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