13
votes
Accepted
What would happen if China called in its debt?
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. ...
- 970
8
votes
Why do people buy negative interest rate bonds?
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 ...
- 58.5k
6
votes
Accepted
Why is the inverted yield curve a good predictor of impending economic recession?
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 ...
- 9,907
6
votes
Are quantitative easing and helicopter cash really different tactics? And how does QE relate to Modern Monetary Theory?
What is QE:
QE is simply an asset purchase by central bank. As explained by Fed St. Louis QE is defined as:
large-scale asset purchases—in the hundreds of billions of dollars range—of, for example, ...
- 58.5k
4
votes
Accepted
Free Data Source for Credit Spreads?
Yes, there's daily data available on the St. Louis Fed's FRED.
- 6,394
4
votes
Accepted
Show that $W_t - \int_0^t \xi_s ds$ is forward-measure-Brownian
(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 $( \...
- 2,619
4
votes
Who owns German debt?
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 ...
- 16.4k
4
votes
How can the bond market be overvalued when the value of a bond is a function of interest rates?
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 ...
- 1,077
4
votes
What would happen if China called in its debt?
Also remember that China's holdings of US Treasury's are a manifestation of the fact that they run a current account surplus with the US e.g. they sell more stuff to us than what they buy from us, ...
- 71
4
votes
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Why is national debt bad if the central bank can keep buying bonds?
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 ...
- 316
4
votes
Why is national debt bad if the central bank can keep buying bonds?
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 ...
- 9,907
4
votes
Printing Money vs. Issuing International Bonds
Bonds are backed by real resources. Money is backed by nothing.
Lets say I'm a British investor. The price of 1 kilo of cotton is 100 British pounds. If I buy a bond for 1 kilo of cotton redeemable ...
- 954
4
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Why do bonds pay back the entire principal at maturity instead of paying it off gradually?
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 ...
- 9,907
4
votes
Accepted
Why is an inverted yield curve NOT a good predictor for recessions except in the US?
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 ...
- 9,907
4
votes
Accepted
Extraction of Inflation Expectation from bond yields
Yes, the number you give is an approximation. If you wanted to calculate the true economic breakeven, you would need to include the effect of the lag used in the indexation process (which includes ...
- 9,907
4
votes
Accepted
Treasury yield data
When first issued, treasuries can be bought directly from the US treasury via auctions, but resulting data on yields is relatively infrequent and only gives a snapshot at issuance, which is then ...
- 1,662
4
votes
Accepted
Price v return on gilts
There is an inverse relationship between the price of a debt contract and the implied yield (or rate of return).
To keep things simple, assume the government issues debt with a contract length of one ...
- 1,662
3
votes
Why does bond price tend to 100?
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 ...
- 9,907
3
votes
Why is the inverted yield curve a good predictor of impending economic recession?
[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 ...
- 223
3
votes
Why would China and Russia selling the US' debt ruin the economy?
The fear is that higher interest rates would damage the economy. The problem with that worry is that the Federal Reserve could buy bonds itself, to cancel out the foreign selling.
The hidden ...
- 9,907
3
votes
Why are German bonds used as the reference for the calculation of Eurozone bond spreads?
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 ...
- 1,435
3
votes
Accepted
Could a hike in interest rates cause a country to be unable to pay back it's debt burden?
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 ...
- 174
3
votes
Why would a central bank buy government bonds?
This is referred to as Quantitative Easing in the field. The theory behind this is that when nominal interest rates have been cut to zero, asset purchases from the private sector at market prices will ...
- 71
3
votes
Why would a central bank buy government bonds?
Because this is how the "government issues new money" in the era of (quasi) independent central banks: instead of directly issuing new money, the government in the narrow sense borrows from the ...
3
votes
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In quantitative tightening do banks have no choice in refusing to buy bonds from Central Banks (mainly Federal Reserve)
The question as it stands now contains points that are debatable. So I will just attempt to answer a similar question; the question could be revised in response.
There are a number of other questions ...
- 9,907
3
votes
Accepted
What do interest rates tell us about the state of an economy?
What do interest rates tell us about the state of an economy?
Very little. That is because interest rates are a mechanism aimed at influencing one of many variables of an economy, rather than to ...
- 1,807
3
votes
Accepted
Can debt to GDP ratio be reduced transfering debt to local autorities?
To answer your second question: a country could probably do that, but it would achieve not much more thereby than clean up that particular statistic. In Europe, the Treaty of Maastricht that specifies ...
- 497
3
votes
Accepted
Can a complex interaction term mean more than what it's composed of?
What you describe as "complex interaction term" is typically referred to as composite variable. Interaction terms are products of two or more variables. You also use terms like "effect" and "meaning"...
- 458
3
votes
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Relationship between default risk and value of bond
[...] underestimating the risk of default is tantamount to overestimating the value of the bond.
The reason behind this is simply due to how bonds are priced.
$$
P = \sum_{n=1}^N \frac{C + M[{I_{n=N}...
- 1,435
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