The bond/gilt market

masonic

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

Turkish govt bonds should probably not be considered risk free. That is why there is a significant spread over the lowest risk bonds available. The key point is that the risk free rate of return doesn't need to be positive in real terms (in theory it doesn't need to be positive in nominal terms either). It certainly hasn't been positive in real terms recently. The "real" risk free rate is something different, see https://www.investopedia.com/terms/r/risk-freerate.asp

And it is just semantics. A consensus was formed about the meaning of the term within that field, and that is what the term is taken to mean by reasonable people discussing investments.

Mikeeee_2

masonic said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

Turkish govt bonds should probably not be considered risk free. That is why there is a significant spread over the lowest risk bonds available. The key point is that the risk free rate of return doesn't need to be positive in real terms (in theory it doesn't need to be positive in nominal terms either). It certainly hasn't been positive in real terms recently. The "real" risk free rate is something different, see https://www.investopedia.com/terms/r/risk-freerate.asp

And it is just semantics. A consensus was formed about the meaning of the term within that field, and that is what the term is taken to mean by reasonable people discussing investments.

It really is because if we apply the phrase to a gilt reaching maturity in April 2024 with a GRY of say, 5.1%, would anyone not consider that a "risk free return" four months from now? Of course not. Who is to decide the duration where it's not a risk free return in that instance? Nobody can because nobody can predict the future inflation rates. We can only calculate what we know.

Funny that @zagfles didn't mention shortfall risk yet. Maybe that's tomorrow's bone to pick with my post 

Johnjdc

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

I am intrigued by how you would propose to settle a disagreement about the meaning of a word or phrase without engaging in semantics, the study of the meaning of words and phrases.

Mikeeee_2

Johnjdc said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

I am intrigued by how you would propose to settle a disagreement about the meaning of a word or phrase without engaging in semantics, the study of the meaning of words and phrases.

There are much bigger things in the world to worry about. It actually makes me sad that I spent quite a lot of time putting this guide together and all people are interested in is the definition of a commonly used phrase.

ChesterDog

Mikeeee_2 said:

Johnjdc said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

I am intrigued by how you would propose to settle a disagreement about the meaning of a word or phrase without engaging in semantics, the study of the meaning of words and phrases.

There are much bigger things in the world to worry about. It actually makes me sad that I spent quite a lot of time putting this guide together and all people are interested in is the definition of a commonly used phrase.

That just shows what a great job you did.

I'm a bit baffled about the argument, too. Risk-free in this context is universally taken to mean the nominal value of capital is assured.

JohnWinder

Mmm. Even when interest rates are negative?

Linton

JohnWinder said:

Mmm. Even when interest rates are negative?

"Risk free" in this sense is a technical term  It means what is offered is absolutely guaranteed barring end of the world as we know it scenarios.  We need technical terms so we can be precise without having to write an essay on the subject each time we mention it.

So yes, if the investment offers and is absolutely guaranteed to provide a negative return then it is "risk free".  Though one could usefully I think add the condition that this negative return is the best absolutely guarateed deal generally available on the market.

zagfles

masonic said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

Turkish govt bonds should probably not be considered risk free. That is why there is a significant spread over the lowest risk bonds available.

Why not? Setting aside default risk and currency risk, so eg for a Turk living in Turkey, why aren't Turkish govt bonds "risk free"? It's blatently obvious to any investor in Turkish govt bonds that inflation risk is the biggest risk in buying govt bonds. Whatever definition of "risk free" is commonly used.

It's also obvious to buyers of flat gilts in any country that inflation is a risk, albeit a far lower risk than in Turkey.

masonic said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

The key point is that the risk free rate of return doesn't need to be positive in real terms (in theory it doesn't need to be positive in nominal terms either). It certainly hasn't been positive in real terms recently. The "real" risk free rate is something different, see https://www.investopedia.com/terms/r/risk-freerate.asp

And it is just semantics. A consensus was formed about the meaning of the term within that field, and that is what the term is taken to mean by reasonable people discussing investments.

It is not "reasonable" to exclude inflation as a risk. The point of virtually every investment is to provide the wherewithall for future spending. That future spending ability will depend just as much on the change in the value of the £ as it does on the change in the number of £s in the investment.

So if people use "risk free" when describing an investment, the term is misleading if inflation isn't accounted for. IMHO.

Notepad_Phil

ChesterDog said:

Mikeeee_2 said:

Johnjdc said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

I am intrigued by how you would propose to settle a disagreement about the meaning of a word or phrase without engaging in semantics, the study of the meaning of words and phrases.

There are much bigger things in the world to worry about. It actually makes me sad that I spent quite a lot of time putting this guide together and all people are interested in is the definition of a commonly used phrase.

That just shows what a great job you did.

I'm a bit baffled about the argument, too. Risk-free in this context is universally taken to mean the nominal value of capital is assured.

You may know that, I may know that, but I'm not sure that every visitor to this site would know exactly what is meant by 'risk free' in that context and why they are not necessarily risk free. So the additional explanatory text is certainly welcomed by me.

Linton

zagfles said:

masonic said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

Turkish govt bonds should probably not be considered risk free. That is why there is a significant spread over the lowest risk bonds available.

Why not? Setting aside default risk and currency risk, so eg for a Turk living in Turkey, why aren't Turkish govt bonds "risk free"? It's blatently obvious to any investor in Turkish govt bonds that inflation risk is the biggest risk in buying govt bonds. Whatever definition of "risk free" is commonly used.

It's also obvious to buyers of flat gilts in any country that inflation is a risk, albeit a far lower risk than in Turkey.

masonic said:

zagfles said:

Johnjdc said:

Mikeee is correct. The risk free rate is the risk free rate, that's what it's called and it just means the nominal return you can get without risking your nominal capital.

The fact that the real terms return might be lower, or even negative, is something to consider when investing, but doesn't affect the definition of the terms.

Now it's just semantics. On that definition you can get "risk free" 27% pa return on Turkish govt bonds

The key point is that the risk free rate of return doesn't need to be positive in real terms (in theory it doesn't need to be positive in nominal terms either). It certainly hasn't been positive in real terms recently. The "real" risk free rate is something different, see https://www.investopedia.com/terms/r/risk-freerate.asp

And it is just semantics. A consensus was formed about the meaning of the term within that field, and that is what the term is taken to mean by reasonable people discussing investments.

It is not "reasonable" to exclude inflation as a risk. The point of virtually every investment is to provide the wherewithall for future spending. That future spending ability will depend just as much on the change in the value of the £ as it does on the change in the number of £s in the investment.

So if people use "risk free" when describing an investment, the term is misleading if inflation isn't accounted for. IMHO.

It is not reasonable to carry out long term planning without including inflation as a risk.  It is perfectly reasonable, in
fact commonplace, to trade in "risk free" fixed rate bonds without considering inflation.  Trillions of £s/$s are  traded every year on the basis that they are risk free - ie the bond issuers are certain to meet their obligations.

If you dont like the terminology you can eiher persuade the bond markets, economists and may other people in the business to change it or educate people if they do not understand what it really means in the context it is used. The first option may not be successful.