Human Antithesis Blogspot

Human Antithesis Blogspot-20
Go look at the just released CBO Long Term Debt Outlook. Perhaps, but the insurance is cheap -- and with a flat or inverted yield curve it's even cheaper.Borrow long to buy insurance, not just for a good deal. In the paper I proposed that the Treasury issue 1) fixed-rate perpetuities -- a security that pays one dollar forever -- 2) floating-rate perpetuities -- just like Fed reserves, the interest rate adjusts daily and the price is always exactly Go look at the just released CBO Long Term Debt Outlook. Perhaps, but the insurance is cheap -- and with a flat or inverted yield curve it's even cheaper.Borrow long to buy insurance, not just for a good deal. In the paper I proposed that the Treasury issue 1) fixed-rate perpetuities -- a security that pays one dollar forever -- 2) floating-rate perpetuities -- just like Fed reserves, the interest rate adjusts daily and the price is always exactly $1.00 3) indexed perpetuities -- it pays one dollar adjusted for the CPI (or one of its improved versions) forever. || Go look at the just released CBO Long Term Debt Outlook. Perhaps, but the insurance is cheap -- and with a flat or inverted yield curve it's even cheaper.Borrow long to buy insurance, not just for a good deal. In the paper I proposed that the Treasury issue 1) fixed-rate perpetuities -- a security that pays one dollar forever -- 2) floating-rate perpetuities -- just like Fed reserves, the interest rate adjusts daily and the price is always exactly $1.00 3) indexed perpetuities -- it pays one dollar adjusted for the CPI (or one of its improved versions) forever.Figures of Speech are a set of tools essential for all writers. .00 3) indexed perpetuities -- it pays one dollar adjusted for the CPI (or one of its improved versions) forever.

Still, I think this is the wrong way to look at it. So, you should not have huge confidence that we will not return to historically normal interest rates of the last few centuries, or moreover that we will never suffer the kinds of interest rate spikes that happen to highly indebted countries trying to roll over 100% of GDP or so debt in a recession, financial crisis, or war.

The Treasury is not in a great position to play bond trader and figure out where small variations in the yield curve reflect profitable opportunities. Like all investors, though, the Treasury's first question should be risk management, not profit. We are clearly going to run up a lot more debt before sanity sets in. If interest rates rise sharply, the US Treasury, having borrowed short, is screwed. This, to me, is the real argument that the government should issue lots more long-term debt; 100 years if needed (but please, only every 10 years or so! Buy the fixed rate mortgage, and you keep the house no matter what happens to rates. In this discussion with Greenwood et al, they argued that the chance of such an interest rate spike is low.

Even if the current ARM rate is higher than the fixed, if ARM rates go down in the future, the ARM could end up being better.

My paper was part of a conference at Treasury, published by Brookings.

If you borrow and sell short the first, you cannot deliver the second in return.

This segmentation would make the markets for each bond thinner, and the bid ask spread larger.I had a good debate with Robin Greenwood, Sam Hanson, Joshua Rudolph, and Larry Summers who wrote The Optimal Maturity of Government Debt (available here). A the time the yield curve was steeply upward sloping, and in their simulations they opined that the chance of short rates rising and long rates declining to the point that the cost advantage would invert was small.The current reality has changed that conclusion as now it is the short rates that are higher. Between "secular stagnation" and "r* has declined" and "savings glut" you can see economists making things up right and left.When the government wants to pay back the debt, it simply buys back the perpetuities on the open market. If the government issues a 0 100 year bond at 3%, only 100/(1.03)^100 = .20 of that value comes from the 0 principal payment.95% of the value of a 100 year bond is already in the stream of coupons. Unfortunately the Treasury website does not say how to send in suggestions, and nobody outreached to me, so this blog post is it.) Perpetuities are bonds with no principal payment. If interest rates are 3%, to borrow 0, the government would sell three perpetuities, and then pay investors each year. (I wrote a whole paper on this a while ago, if you want lots of detail and answers to practical questions.The 2123 2.6% 100 year bond is a different bond from the 2124 2.7% 100 year bond.If a dealer has an order for the first and an offer for the second, he or she cannot make the trade.If the treasury offered a fixed-value floating-rate instantly transferrable security just like reserves, it would do wonders for the financial system.In some respects, they are the foundation of communication.

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