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27

Some pictures and text are from Schroders, Marketwatch and other websites, but I don't remember all them. Of note, Germany first sold negative-yielding bonds in Aug 2019, €2bn worth of 30-year bonds that offer no interest payments at all. 1. Better than holding cash Cash is obviously most liquid, but some central banks like Japan impose negative interest ...


20

In general, there are three kinds of debt: Secured debt, like a mortgage or a repurchase agreement. With a mortgage, for example, the debt is secured by a lien on the home, and if the debtor does not pay, the creditor can seize the home. Unsecured debt, like a credit card or corporate bond. Governments will generally allow creditors to liquidate many of the ...


12

You have to understand how international debt works. These are not loans, but bonds. China buys a US bond for, e.g., 98 USD. This bond is a promise by the US Treasury to pay 100 USD one year from now. China owns a lot of this type of bonds. Once the bond hits maturity, China is paid 100 USD and the thing it typically does with these 100 USD is it buys the ...


7

There are several reasons why it makes still sense. Nominal negative return does not mean that real return is negative. There is a difference between nominal interest rates and real interest rates which can be expressed by the Fisher formula: $$ i \approx r + \pi$$ Where, $i$ is the nominal interest rate, $r$ is the real interest rate and $\pi$ is ...


6

1.- The government imposed an austerity program and, in exchange, received assistance from the IMF and the EU. 2.- The ECB made it clear that it would do whatever as necessary to save the Euro, even buying sovereign bonds of Euro countries. 3.- A general improvement in financial conditions around 2013 throughout the world let to a decline in default premia....


6

Suppose the face value of a bond is $M$ and its interest rate is $\tau$. This means it will pay $\tau \cdot M$ interest every year (other periods are also possible) and at the end of its run (its maturity) it will also repay the face value $M$. Government bonds are usually sold in auctions. Whatever ends up being the market price is considered to be the ...


6

There is a fair amount of ambiguity to this question. The first question is: what is the yield curve? A fixed income investor may refer to the yields across all maturities as the yield curve, while economists pick the difference in yields between two arbitrary maturities as the yield curve. Which two? Typical choices are the spread between the 2-year and 10-...


5

The most famous perpetual bonds are UK Government Bonds known as consols. They weren't issued to avoid the rollover risk you highlight. Rather, their key benefit was liquidity. They could sell new consuls on the same terms as the old consuls and they have enhanced liquidity because it made the new and old issue more liquid. They turned out to be a pretty ...


5

Bond yields falling from their current near-zero position will place them in negative yield territory. Negative bond yields are deflationary by definition. Paragraph 3, sentence 5 of the article says: With Bank Rate already close to the floor, and some UK bond yields now in negative territory... [emphasis added] To understand why negative bond yields are ...


4

(Looking at the question and notation used more closely, the formulation seems to be problematic in couple places.) General Fact Let $W$ be standard Brownian motion with respect to filtration $( \mathscr F_t )_{t \in [0,T]}$. Consider $(L_t)_{t \in [0,T]}$ defined by $$ \frac{dL_t}{L_t} = \psi_t dL_t, \; L_0 = 1. $$ In general, $L_t = e^{\int_0^t \psi_s ...


4

Yes, there's daily data available on the St. Louis Fed's FRED.


4

They just issue new debt to roll over the principal anyway. Unlike individuals, they do not have a fixed life span. Trading amortising bonds in the secondary market is a pain, since you then need to keep track of the amortising schedule when pricing them. (This point was discussed in comments. The calculations for amortising bonds in 2018 are straightforward,...


4

I’m currently researching this topic, and I have not found any single reference that answers this (... besides my work). I will summarise what I have seen. I would point out that from a research perspective, having the yield curve work is interesting, while a failure to predict recessions is not interesting. Very few journals publish articles on failed ...


4

This is veering into the direction of an opinion-based answer, but I would argue that there is no particular evidence that the Fed “needs” to reduce the size of its balance sheet. If the Fed wanted to revert to its pre-2008 mode of operations - where interest is not paid on reserves - it would be required to reduce its balance sheet so that there are no ...


3

Fannie Mae and Freddie Mac bonds have long been viewed as having an implicit government guarantee, and though they received government support during the crisis, they never missed a payment to bondholders. This implicit guarantee was strengthened in July 2008 when Congress passed the Housing and Economic Recovery Act of 2008, which created a channel through ...


3

I cannot see the mechanism as to why if central banks set rates in positive territory when long term bonds yields are negative how this will cause the yield curve to invert. No need to seek a mechanism because the inverted yield curve occurs by definition in the scenario you describe. This Investopedia video defines inverted yield curve as follows: An ...


3

Central banks usually buy back government bonds to combat deflation and facilitate economic growth. This policy is commonly called "quantitative easing" or QE. After the arguable success of QE during 2008-2009 recession in the United States, many other countries choose to adapt this monetary policy. It is very unlikely that the Bank of Japan will keep this ...


3

This Deutsche Bank figure from 2013 has some broad categories for German debt and compares it with other rich countries: A newer chart, using slightly with more granular categories. Note that Germany is DE.


3

This is at the same time 1) a little old and 2) provides a deeper and more general answer that what you might be looking for, but I would still encourage you to go through it. http://www.its.caltech.edu/~melliott/papers/financial_networks.pdf with a preview in https://www.youtube.com/watch?v=mjS81EoBQOU (starting around 1'07) and a complete didactic ...


3

This is a pretty standard bond pricing issue. The short answer is yes, the market value of the bond can and often will exceed its par value if interest rates are below the coupon rate, just so long as the call option is structured such that the government must pay any interest that has accrued between the last coupon date and the time that the call option is ...


3

"And also does this have anything to do with discounting vs. coupon bonds, etc?" It does. Assume a bond without coupons, to be fully re-paid in a single payment. On it ("face value" $\equiv B$) the bond writes the amount to be paid, as well as the date of payment. In such a situation, the "face value" includes both the principal amount and the interest....


3

Think of it this way: A dollar today is worth more than a dollar tomorrow Why? Because today you can invest it, and have more money tomorrow! How much more money? It depends on the interest rate. The interest rate on government bonds basically says: "Whoever you are, if you lend me this money I am going to give you back all of it plus a certain interest". ...


3

Here's a non-technical answer: Bonds are a form of debt. What the issuer is selling is essentially a promise to repay the principal (i.e. whatever price the buyer paid) and some interest to the buyer. (Note: since we're talking about debt, you could also think of the buyer as a lender.) In return, the issuer gets to use the money from the sale for ...


3

The short answer is no, rate hikes have no effect whatsoever on whether a government can service its debt and repay maturing issues. Here's why--- A government that issues debt in its own currency can always print currency to make its debt payments. This is an extremely important point, despite that certain political actors would like you to forget it. ...


3

German bonds placed as a reference in the eurozone is a form of tacit understanding and i don't think you will find official conventions about this. This practice comes from market Finance pricing technics, as the CAPM, which use a risk (-free-rate) referential to price different kind of assets. Given the higly positive trade balance of Germany, the ...


3

How can the bond market be overvalued? To value a bond, you need, as you mention, to discount future cash flows. The cash flows (or coupons) are fixed, but the discount rate is not, and every investor may have a different view on interest rates and hence price bonds differently. Therefore, someone thinking that interest rates will remain at rock-bottom ...


3

There’s two prices for a bond: Invoice or dirty price: what you actually pay; and the clean price, which is the dirty price less accrued interest. In market convention, the clean price is the quoted price. Accrued interest starts off at \$0 at a coupon date, and then rises (roughly) linearly each day until it matches the value of a coupon at the coupon ...


3

[I can't possibly compete with the credentials of Brian Romanchuk so I write this answer simply to continue the discussion.] Isn't there an argument based on maturity transformation? Maturity transformation is that process by which banks create long terms loans from short term deposits. So, equity share price analysts will take about how a steeper yield ...


3

Yes. The central bank (say the Fed in U.S.) can purchase bonds, but notice: The Fed is not going purchase t-bonds and t-bills directly from the Treasury. It will only purchase or sell bonds in the market. ("Open market purchase" or "open market sell.") Open market purchase is not only the buying of bonds, but also the creation of money. (You sell bonds to ...


3

This site is aimed to give non-opinion based answers; this question is worded in a way that leads to opinions (“bad”). I will do my best to give a straight answer. I would argue that it is safe to say that there is a lot of hidden politics in discussion of fiscal policy and government debt. If someone does not like policy X, and policy X is popular, it is ...


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