Sex 'n' Drugs 'n' ZIRP

cells

jamesd wrote: »

You may find it useful to work out what change in capital value of a ten year term remaining bond it takes to increase its interest rate for a buyer from 0.5% to 3.5%.

Can you explain the significance of this

also as I've posted I think the real world impacts interest rates magnitudes more than interest rates impacting the real world

cells

michaels wrote: »

But with an aging population perhaps people prefer spending tomorrow to today, particuarly with increased income inequality those with spare income would rather consume in the future than today. Don't forget we have seen another huge shift in the economy, a massive increase in life expectancy in retirement.

The majority live virtually hand to mouth with maybe a month or two saving as a buffer. Interest rates at zero or at 10% or anything in between will make no difference to their consumption.

So increasing interest rates will have nil impact on the price of milk or bread or toilet paper or mobile phone contracts or....pretty much everything.

so I don't think the BOE rate movements have much of an impact on the CPI basket.

of course they will have an impact on mortgages. But not far off two thirds of homes have no mortgage (social and owned outright) and a good portion of the one third that do have fixed rates or a small mortgage. So trying to impact disposable income via interest rates has little to no impact on maybe as much as 90% of households.


You then turn to companies. Five years from now machinery x might be 1/3rd the cost. That outweighs by a huge factor in the decision to buy it or not than interest rates moving two points

Generali

cells wrote: »

Can you explain the significance of this

also as I've posted I think the real world impacts interest rates magnitudes more than interest rates impacting the real world

If bond yields increase from 0.5% to 3.5% a 10 year bond will lose of the order of 30% of its value.

That would be a cost to the BoE of c£120,000,000 and to the Federal Reserve of c$1,250,000,000,000,000 if all their holdings are 10 year bonds (which they aren't so the actual losses to Central Banks will be less but that gives an idea of scale). The Fed would probably go bust but as it literally has a licence to print money I doubt that would be an insurmountable problem unless the politicians did something very stupid.

Annuity providers will see the mark-to-market value of their bonds reduced significantly and many would be technically insolvent (after the dot com boom the BoE simply changed the solvency rules WRT insurance companies and would do so again, however you could probably expect an Equitable Life or two).

Plenty of pension funds would probably be calling on the Government guarantee and quite a few pensioners that thought they'd be retiring quite splendidly would be having to watch the pennies a little more closely or simply retiring a few years later.

Of course that's the beauty of a bond. If you simply don't mark it to market, you get the income flows and then your money back at the end, assuming the seller doesn't default.

purch

Generali wrote: »

Of course that's the beauty of a bond. If you simply don't mark it to market, you get the income flows and then your money back at the end, assuming the seller doesn't default.

Thats the advantage of holding a Bond directly, and not being silly and thinking you get the same risk profile by investing in a Fund that holds Bonds.

Generali

purch wrote: »

Thats the advantage of holding a Bond directly, and not being silly and thinking you get the same risk profile by investing in a Fund that holds Bonds.

Yup. We have funds that, at present, are looking to earn alpha returns from bonds. By definition that means that the PMs aren't looking to hold to maturity.

1/3rd of our main bond benchmark has a negative yield to maturity. We should patent a cash ETF. Benchmark it against one of the main bond indices, UBS do a good cheap one I think, and charge 25bps to hold CHF. It's cheaper than opening a CHF bank account so the clients win and we (obviously) win.

List it on the Irish Stock Exchange which is cheap and reasonably clean (AIM was my other thought hence the ISE seeming clean). Make a motza.

cells

Generali wrote: »

If bond yields increase from 0.5% to 3.5% a 10 year bond will lose of the order of 30% of its value.

Yes I can understand that is true but so what....?

Generali wrote: »

That would be a cost to the BoE of c£120,000,000 and to the Federal Reserve of c$1,250,000,000,000,000

No as far as I can see it would be a cost of zero to them. They sold a bond at X and pay a coupon of Y to the holder. Y does not change so there is no difference at all in cash flow to the BOE/Fed. And it can account for X however it likes but the value of X at the end of the term is X no more no less.

Generali wrote: »

if all their holdings are 10 year bonds (which they aren't so the actual losses to Central Banks will be less but that gives an idea of scale). The Fed would probably go bust but as it literally has a licence to print money I doubt that would be an insurmountable problem unless the politicians did something very stupid.

Why?

I can understand that their "book value" might be negative but their cash flow is the same.

Think of a BTL. House prices might crash tomorrow but if your rent is twice your mortgage you keep keep the show on the road for many more years (until you need to refinance, by which time rents and prices will likely be higher)

If anything the Fed/BOE and its government would be better off holding a trillion dollars in 10 year bonds rather than 1 month bonds if interest rates are to go from 0.5% to 5%. The book value crash will be much higher but the actual payments much lower as their "mortgage" is fixed at 0.5% for 10 years rather than having to go directly to a variable rate of 5%

Generali wrote: »

Annuity providers will see the mark-to-market value of their bonds reduced significantly and many would be technically insolvent (after the dot com boom the BoE simply changed the solvency rules WRT insurance companies and would do so again, however you could probably expect an Equitable Life or two).

surely the annuity companies are just a middle man and pass on most/all their costs/risks to the clients?

If myself and a thousand others buy an annuity from Company A, they go and buy a bond to cover it. It is effectively a near 100% hedge.

If interest rates rise, effectively the value of my "virtual bond" in the form of my annuity falls but I can not trade it anyway so whats the problem

Generali wrote: »

Plenty of pension funds would probably be calling on the Government guarantee and quite a few pensioners that thought they'd be retiring quite splendidly would be having to watch the pennies a little more closely or simply retiring a few years later.

Of course that's the beauty of a bond. If you simply don't mark it to market, you get the income flows and then your money back at the end, assuming the seller doesn't default.

the value of the pension funds might fall but the liabilities and income dont.

If anything were I a pensioner, I would very much like interest rates to go up. my pension would buy me a much better annual income in retirement if that happened.

How can whats fantastic for pensioners be terrible for pension companies (which are effectively just custodians of the their savings). unless of course the pension fund is already in long term bonds for most its holdings, in which case its time to sharpen the pitchforks

Generali

cells wrote: »

Yes I can understand that is true but so what....?



No as far as I can see it would be a cost of zero to them. They sold a bond at X and pay a coupon of Y to the holder. Y does not change so there is no difference at all in cash flow to the BOE/Fed. And it can account for X however it likes but the value of X at the end of the term is X no more no less.



Why?

I can understand that their "book value" might be negative but their cash flow is the same.

Think of a BTL. House prices might crash tomorrow but if your rent is twice your mortgage you keep keep the show on the road for many more years (until you need to refinance, by which time rents and prices will likely be higher)

If anything the Fed/BOE and its government would be better off holding a trillion dollars in 10 year bonds rather than 1 month bonds if interest rates are to go from 0.5% to 5%. The book value crash will be much higher but the actual payments much lower as their "mortgage" is fixed at 0.5% for 10 years rather than having to go directly to a variable rate of 5%




surely the annuity companies are just a middle man and pass on most/all their costs/risks to the clients?

If myself and a thousand others buy an annuity from Company A, they go and buy a bond to cover it. It is effectively a near 100% hedge.

If interest rates rise, effectively the value of my "virtual bond" in the form of my annuity falls but I can not trade it anyway so whats the problem

the value of the pension funds might fall but the liabilities and income dont.

Because one of the definitions of insolvency is liabilities > assets.

cells wrote: »

If anything were I a pensioner, I would very much like interest rates to go up. my pension would buy me a much better annual income in retirement if that happened.

You are only considering cash values I think. If interest rates rise the value of your assets fall but those assets can buy a higher income per quid of value. Net/net you're probably about in the same place.

cells wrote: »

How can whats fantastic for pensioners be terrible for pension companies (which are effectively just custodians of the their savings)

Pensioners have government guarantees. Pension companies do not.

michaels

Generali wrote: »

Yup. We have funds that, at present, are looking to earn alpha returns from bonds. By definition that means that the PMs aren't looking to hold to maturity.

1/3rd of our main bond benchmark has a negative yield to maturity. We should patent a cash ETF. Benchmark it against one of the main bond indices, UBS do a good cheap one I think, and charge 25bps to hold CHF. It's cheaper than opening a CHF bank account so the clients win and we (obviously) win.

List it on the Irish Stock Exchange which is cheap and reasonably clean (AIM was my other thought hence the ISE seeming clean). Make a motza.

Before when there used to be seperate stocks and shares and cash isas I thought there was scope to launch a 'behaves like cash but qualifies as a bond' fund so that people who wanted to use their s&s isa allowance but wanted to have no capital risk like a cash isa.

Still think a pension company underwritting an annuity buys a bond so that the coupons cover the liabilities rather than worrying about the mtm.

jamesd

cells wrote: »

I don't think interest rate movements up or down a few points will impact CPI inflation much at all but will impact asset prices a little but not a lot

jamesd wrote: »

You may find it useful to work out what change in capital value of a ten year term remaining bond it takes to increase its interest rate for a buyer from 0.5% to 3.5%.

cells wrote: »

Can you explain the significance of this ... also as I've posted I think the real world impacts interest rates magnitudes more than interest rates impacting the real world

The relationship between the capital value of bonds and interest rates is one of the most fundamental ones in investments. As Generali explained the capital loss would be around 30%, which is a lot for investments that are often portrayed as risk free or the lowest risk investments available (in the case of gilts).

A rapid rise of that sort would mean huge capital losses for pensions and bond fund holders of all sorts. If they survived - and they probably would - they could eventually get the maturity value but with pension funds often using 15 to 20 year bonds their losses could well be larger than just 30%. Because as you should know, the capital loss increases as the term increases, because the capital value has to subsidise the yield for longer. This is also why short-dated bonds - maturing within one to say three years - are often mentioned as a protective bond for cases of rising interest rates. the reduced number of years reduces the capital loss and it's easier to hold to maturity and completely avoid it.

The corollary significance is that you have proved that you don't know enough about asset pricing and responses to interest rate for your thoughts on the subject to have any credibility at all.

There's a free online Open University affiliated course that you might find interesting that is still open. It'll help you to have some clue about the subject rather than proving your lack of knowledge of the subject with every post you make as you have been in this discussion so far.

cells

jamesd wrote: »

The relationship between the capital value of bonds and interest rates is one of the most fundamental ones in investments. As Generali explained the capital loss would be around 30%, which is a lot for investments that are often portrayed as risk free or the lowest risk investments available (in the case of gilts).

ok.....but we are or were discussing what impacts and moves and determines interest rates.

so what has bond values got to do with the direction of interest rates? unless you are suggesting bond buyers as a market set wider interest rates in the whole economy (rather than the other way around)?

jamesd wrote: »

A rapid rise of that sort would mean huge capital losses for pensions and bond fund holders of all sorts.

again off topic, but bonds are two way contracts. If a company issues a bond and a pension fund buys it. If interest rates go down the pension fund has to write down the value of its bond holding but there is surely a corresponding decrease in the value of the debt owned by the issuing company

jamesd wrote: »

If they survived - and they probably would - they could eventually get the maturity value but with pension funds often using 15 to 20 year bonds their losses could well be larger than just 30%.

again so what has this to do with the direction of interest rates?

jamesd wrote: »

The corollary significance is that you have proved that you don't know enough about asset pricing and responses to interest rate for your thoughts on the subject to have any credibility at all.

I did not post any thoughts on asset pricing and responses to interest rates for you to determine such a thing

I posted my thoughts on factors that impact on interest rates, and you have somehow flipped it to a debate on factors that impact bond prices

the only way you can link the two is if you think bond prices by in large set interest rates rather than other factors

jamesd wrote: »

There's a free online Open University affiliated course that you might find interesting that is still open. It'll help you to have some clue about the subject rather than proving your lack of knowledge of the subject with every post you make as you have been in this discussion so far.

Thanks but this isnt an actuarial exam its an internet forum, im happy to make mistakes and learn as I go along.