Sex 'n' Drugs 'n' ZIRP

Thrugelmir

Generali wrote: »

Who said they do?

The Fed seem to want to show the market who the boss is.

jamesd

cells wrote: »

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

You asserted in that discussion that interest rates would not affect asset prices much. That assertion is wrong.

cells wrote: »

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

The issuing company or government obligation does not change at all. It is still required to pay the full coupon (interest) and to repay the bond on its original schedule for its agreed final price, which is usually the issued price.

cells wrote: »

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

You've been quoted doing just that three times so far by two people. Here it is again:

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

That's a claim that interest rate movements won't affect asset prices much.

cells wrote: »

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

You may have missed my point. It was to demonstrate through your answers to basic questions the extent of your knowledge of the subject of interest rates, causes and effects.

cells

jamesd wrote: »

You asserted in that discussion that interest rates would not affect asset prices much. That assertion is wrong.

no i dont think i did that at all

I said interest rates have little to no impact on infrastructure spending. I cited that house building, commercial building, industrial building, roads, rail, airports, ports, power stations all of that infrastructure is determined by other things far far moreso than interest rates

I said that as Generali said interest rates going up would incentiveise saving today to spend tomorrow and them going down incentives spending today rather than saving for tomorrow. I noted that the big spenders, the big infrastructure projects (of which housing is the biggest) have no such correlation to interest rates.

jamesd wrote: »

The issuing company or government obligation does not change at all. It is still required to pay the full coupon (interest) and to repay the bond on its original schedule for its agreed final price, which is usually the issued price.

but for your bond to fall in price by 30%, there needs to be a traded market for price discovery and for you to mark it down to market. If that is true, then the bond issuer can go into that market and buy back its bonds for 70p in the £1.

So if someone has lost 30%, the counterpart to the "contract" has gained the same amount on an accounting basis if marked to market

jamesd wrote: »

You've been quoted doing just that three times so far by two people. Here it is again:That's a claim that interest rate movements won't affect asset prices much.

What assets are in CPI basket that you think interest rates will change the price of?

Bread? eggs? toilet paper? shoes? ipods?

jamesd wrote: »

You may have missed my point. It was to demonstrate through your answers to basic questions the extent of your knowledge of the subject of interest rates, causes and effects.

no, all you did was say that your example bond falls in price by 30%.

You then somehow go on to try and link a 30% fall in the value of bonds to the value of eggs in the CPI basket

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To be fair to you, I think you are trying to say....interest rate movements will impact the bond market and the shares market. I did not comment on that and don't disagree,

I said it looks like to me interest rates have little impact on the CPI and RPI basket (with other factors far more dominant). I also said the idea of interest rates determining spending today vs saving today is weak in the real economy because A. a lot of the economy is hand to mouth B. big capital spending, which should be directly linked to interest rates (lower = more, higher = less) is in the real world not linked to interest rates. eg lower interest rates dont result in more house building, nor does higher interest rates result in fewer house building. I also noted that interest rates will impact mortgage payments but that maybe as much as 80% of households are totally or largely immune from that (own outright, social tenants, renters) so trying to impact the amount of money in peoples pockets via interest rates feeding into mortgages is probably not very effective (especially in the short term)

jamesd

OK, so it appears that there's some progress, with you recognising that interest rate movements affect the bond and shares markets. I assume that you'd also agree that 30% is significant? Would you also agree that those are assets?

A bond issuer can normally buy their bonds on the open market at any time. What big companies do is swap between equity and bonds. When equity is cheap and bonds aren't, they use equity and can issue more shares to buy back cheap bonds. when bonds are cheap they can use bond financing to buy back shares. These are routine corporate transactions, happening regularly.

What a company will be less keen on doing is just buying back bonds without substituting other money. This is because the bond will have been issued to fund some new business development project and the project will still need funding.

Interest rate effects on inflation depend on the specific inflation measure and a time lag. In RPI inflation variable rate mortgages have an effect but CPI in general still trips out housing costs, I think, so that very rapid effect isn't there.

The other effects take more time to work through the system, with a lag in the range of 18 months or so the sort of thing that is routinely expected. The effects here come from business investment decisions. As the price of money goes up, projects that make less money change from being profitable to unprofitable and can get stopped. In the short term that means the company not becoming more efficient and able to lower prices if say a new production line that is more efficient isn't built. Longer time it reduces demand in the economy because the assorted bits of building of various types don't happen. A shipping company might not upgrade to more efficient trucks, so fuel costs would hurt it more than it money had been cheaper.

cells

jamesd wrote: »

OK, so it appears that there's some progress, with you recognising that interest rate movements affect the bond and shares markets. I assume that you'd also agree that 30% is significant? Would you also agree that those are assets?

A bond issuer can normally buy their bonds on the open market at any time. What big companies do is swap between equity and bonds. When equity is cheap and bonds aren't, they use equity and can issue more shares to buy back cheap bonds. when bonds are cheap they can use bond financing to buy back shares. These are routine corporate transactions, happening regularly.

What a company will be less keen on doing is just buying back bonds without substituting other money. This is because the bond will have been issued to fund some new business development project and the project will still need funding.

Interest rate effects on inflation depend on the specific inflation measure and a time lag. In RPI inflation variable rate mortgages have an effect but CPI in general still trips out housing costs, I think, so that very rapid effect isn't there.

The other effects take more time to work through the system, with a lag in the range of 18 months or so the sort of thing that is routinely expected. The effects here come from business investment decisions. As the price of money goes up, projects that make less money change from being profitable to unprofitable and can get stopped. In the short term that means the company not becoming more efficient and able to lower prices if say a new production line that is more efficient isn't built. Longer time it reduces demand in the economy because the assorted bits of building of various types don't happen. A shipping company might not upgrade to more efficient trucks, so fuel costs would hurt it more than it money had been cheaper.

Fine, you are talking about the impact of interest rates on assets and specifically the bond market

I was talking about, what impacts interest rates and to a lessor extent how interest rates impact asset formation (eg building things). Two different topics

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Anyway, interest rates are fundamentally a price set by two parties who form a loan between themselves. The price of that loan is determined by many factors. The borrowers situation and prospects, the economy, technology, lifespan, laws, regulations, wars, safety, liquidity, etc. I tried to make the argument that pretty much all of those things have gone in the direction to favour lower interest rates which is why since the end of the cold war interest rates have been on a mostly one way street down.

Even pre currency there was "interest rates". You lend me a ton of potatoes for this winter and ill give you X% more next winter. The figure of X is set between us depending on many of the same factors listed already