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Discussion: (7 comments)

  1. Jardinero1

    So what happens to the real economy as we move away from ZIRP and bondholders are cut to pieces?

    Anyone holding a ten year treasury priced to yield 2.86 percent, as of today, will be worth about 60 cents on the dollar if rates bounce up to just five percent in a year or eighteen months.

    1. Guess what entity will be the biggest holder of 10 yrs.

      1. Jardinero1

        It doesn’t really matter who has 10 year treasuries because every single bond holder, of any type, will get hammered. If the risk free rate goes up then the whole yield curve moves out for every type and maturity of bond that exists. Think about who will get whacked, I refer to insurance companies, pensions, banks, blue haired old ladies, the Bank of China, the Bank of Japan. When interest rates go up, and the bond market tanks; it will make the mortgage meltdown look puny.

  2. Benjamin Cole

    Well guess what? A robust economic recovery would raise interest rates. Should we stifle economic growth to be nice to bondholders?

    Add on: There is a global glut of capital. Don’t hold your breath for higher rates.

    1. Jardinero1

      My issue is not with rates going higher. It is with the fact that the Federal Reserve drove the risk free rate so artificially low in the first place. The glut of capital is mostly parked in bonds. If bond prices fall, what happens to the glut?

  3. Benjamin Cole

    Jardinero1–

    I don’t think the Fed can directly affect long-term rates. No one is forced to buy US bonds or lend in the private sector.

    One could, at any point in time, claim the Fed had pushed rates artificially low or high. What makes a rate artificially low or high? Were rates artificially high pre-2008?

    If rates go higher due to QE, that is because people believe that the QE sellers of bonds will start spending their money and boosting the economy. Which I hope they do.

    1. Jardinero1

      Hello Benjamin,

      The treasury yield curve is the risk free rate. the rest of the yield curve is based on that. The fed keeps the risk free rate down by purchasing longer term,government backed securities on the open market. It has been accumulating these securities for the last five years to the tune of three trillion dollars. At some point the fed has to move those off of its balance sheet to somewhere else. You are right, no one has to buy them. That is when the price of those bonds will fall and rates will rise.

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