RET
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Post by RET on Dec 18, 2016 10:15:22 GMT
In Greg Jericho's article " Even though Myefo figures might cost us our AAA rating, the Coalition faces greater dangers", he makes the following claim: I'm reasonably confident that's rubbish, but by the same token don't profess to know everything. So I commented on the article: The author does frequently engage "below the line" if you get in early enough - before all the usual suspects pile in and start shouting at each other - but alas I've had no response. I'm reasonably well-versed in MMT, and comfortable enough to discuss it with anyone in person or online. But perhaps there are intricacies in the bond market and mechanisms I'm not entirely across, hence seeking guidance from the participants on this forum. Is there any basis to the claim? |
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Post by Iain Dooley on Dec 19, 2016 8:38:33 GMT
RET Analysis like this often has me losing the forest and tangled in the trees but this article is the most thorough treatment of bonds and yields and all that crap I have ever read: www.bennelongfunds.com/insights/175/investment-perspectives-australian#.WDqPj7U8bYUPersonally it makes my head hurt and when I have asked Steven Hail or Bill Mitchell about this whose opinions I trust far more than Greg Jerichos they basically simplify it down to "no he's wrong" which is good enough for me but I must admit that bond markets and stuff is an area where my monetary-fu is still pretty weak so a robust diessection of the above article would be most appreciated
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rod
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Post by rod on Dec 19, 2016 9:34:58 GMT
Here's my take on bond market not sure its 100% but willing to be corrected.
Bonds trade on the secondary market are odd and are often traded below face value.
So if you buy a bond at below face value then your effective yield goes up if hold the Bond to maturity.
If people think that interest rates are going to rise they will try to offload Bonds with low interest rates ie coupon rate
and will discount the price below face value so the effective yield rises.
So that's bond trading on the secondary market when it comes to the primary market if traders think that inflation is rising
then they will want to bid up interest rates so that they won't be losing money if inflation is higher than the interest rate.
especially if they are bidding for long term bonds ie 10yrs so basically they are the cash rate plus something for inflation and since
its a reverse auction if you want to get some bonds you can't bid too much above what you the RBA will lend at last resort ie cash rate +.25%
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RET
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Post by RET on Dec 19, 2016 10:03:35 GMT
Hey Rod, thanks for that explanation, it's quite clear. Most appreciated. I get that the yields on secondary bonds are going to fluctuate as they're traded.
But... I'm no closer to a resolution of the original question as to why GJ would assert that the rate rise in the US has directly affected the Australian government's interest payments on its debt.
As I said in the original post, I'm confident that he's talking rubbish, but would welcome a definitive answer.
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Post by Iain Dooley on Dec 20, 2016 0:41:29 GMT
Ellis just posted this in response to another article on SMH, not sure if it helps: |
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rod
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Post by rod on Dec 20, 2016 2:32:25 GMT
Normally with fixed Bonds the coupon rate is what the Govt pays but there are also Treasury Indexed Bonds fixed interest but the nominal value changes with CPI.
So with fixed Bonds new tenders could see the interest rate bid up.
The Face Value and Nominal Value of a Treasury Indexed Bond both start at $100 around the time the bond is first issued, but whilst the Face Value remains fixed, the Nominal Value is adjusted by changes in the CPI. With inflation (a rise in the CPI), the Nominal Value increases. With deflation (a decline in the CPI), the Nominal Value decreases.
Changes in the CPI affect both the size of Coupon Interest Payments made every three months and the amount paid to the holder of a Treasury Indexed Bond when the bond matures. Treasury Indexed Bonds make Coupon Interest Payments at a fixed rate. Because the fixed rate is applied to the Nominal Value, Coupon Interest Payments can vary in amount from one period to the next. If inflation occurs, the Coupon Interest Payment increases. In the event of deflation, the Coupon Interest Payment decreases.
There is a floor on Coupon Interest Payments which may protect holders of Treasury Indexed Bonds in an environment of deflation: no Coupon Interest Payment will be based on a capital value of less than $100. If the Nominal Value falls below $100, the Coupon Interest Payment will be paid on $100. In the event that the floor is utilised, succeeding Coupon Interest Payments and/or the maturity payment will be reduced by the difference between the Coupon Interest Payment amount which was made and the payment which would have been made in the absence of the floor.
At the maturity of a Treasury Indexed Bond, the holder receives the Nominal Value or the Face Value amount, whichever is greater. This provision also limits the exposure of the bond holder to deflation.
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