Auditor posted this cool diagram from the BBC yesterday.



I can follow the diagram ok, and I think it's a good one.
My question though is what is a bond market, or what is a bond ? I can't seem to get my head around that.

And while you're at it, what is a gilt.

I'll make a stab at this - is a bond a share in the productivity of your country? I read in the Tribune or SBP recently that the Chinese have bought a shitload of Irish bonds recently and I presume they are a promise to pay those bonds back with interest. So it's a loan sought by the government or moreso, a type of share in a nation that generates a dividend... does that fit into the above?

Couldn't tell you what a gilt is unless it's a species of the above.

edit - since all bank deposits are insured by the government, the bank in order to generate money for mortgages might have to ultimately borrow from the government.

Wide open to correction.

Auditor #9 wrote:

I'll make a stab at this - is a bond a share in the productivity of your country? I read in the Tribune or SBP recently that the Chinese have bought a shitload of Irish bonds recently and I presume they are a promise to pay those bonds back with interest. So it's a loan sought by the government or moreso, a type of share in a nation that generates a dividend... does that fit into the above?

Couldn't tell you what a gilt is unless it's a species of the above.

edit - since all bank deposits are insured by the government, the bank in order to generate money for mortgages might have to ultimately borrow from the government.

Wide open to correction.

A bond is a form of government debt. Variations of these go under different names. In the UK, gilts are government debt which is for a fixed period, paying interest in six monthly periods. The interest is called a coupon. The coupon can be stripped out of the gilt and traded separately as a strip. The remaining "principal" is called a zero-coupon gilt.

Gilts are also the name given to government debt in Ireland.

In the US, Treasury Bonds, Treasury Notes and Municipal Bonds fulfill a similar function and operate in broadly the same way.

Auditor #9 wrote:

I'll make a stab at this - is a bond a share in the productivity of your country? I read in the Tribune or SBP recently that the Chinese have bought a shitload of Irish bonds recently and I presume they are a promise to pay those bonds back with interest. So it's a loan sought by the government or moreso, a type of share in a nation that generates a dividend... does that fit into the above?

Couldn't tell you what a gilt is unless it's a species of the above.

edit - since all bank deposits are insured by the government, the bank in order to generate money for mortgages might have to ultimately borrow from the government.

Wide open to correction.

Bonds are to governments what personal loans are to you and I. The government wants to build a new road network. This will cost 15 billion euro. The government receives 50 billion in taxes and spends 48 billion on government expenditure so it cannot fund the roads network out of current income. It is like you wanting to buy a house, it is usually impossible to finance that merely out of your weekly take-home package.

The government gets the 15 billion by issuing a bond on the stock market. They borrow 15 billion from various financiers, the IMF and World Bank if you're an LDC or international banks and sovereign funds if you're a rich country. The government gets the 15 billion it needs and puts it to work by procuring lands, purchasing building materials, spending on planning, doing Environmental Impact Statments and the like.

The investors in the bond are now looking for a return. The government promises to pay a certain percentage interest on the amount that they have borrowed through the bond. If you are a risky emerging economy, that interest rate would be very high and usually above 10%. That is because investors would fear that you would be unable to pay back and default on loans. This is the risk premium. If instead you are a rich, stable, dependable country, your bond's interest rate could be as low as 2%.

This bond now becomes a tradable instrument in the sense that the original investors can sell their stake in the bond to other investors. This means that the bonds can go up in price if economic prospects for the country brighten and fall if the opposite occurs.

I will just add a bit. A bond is just another name for an IOU. When you get a mortage to buy your house you have in effect issued a bond to the bank. Your bond, or promise to repay, is an asset for which the bank is willing to pay X amount of money.

When one wants money you issue a bond at an auction and the level of demand will determine the price you get. The price gotten determines the interest rate paid. The higher the price the lower the interest rate.

When the issuer(borrower) is a national government it is called a Treasury bond, English gilt German bund or say Russian bond. When it is a company it is called a Corporate bond. When it is a city, town or other government unit short of a national government it is called a Minicipal (Muni) bond.

A bond Auction is a detailed operation that I explained before when there was a discussion on Ireland borrowing 6 billion euro. Most would not be expected to know but it is easy enough when explained.

Another area that is not highlighted often but is very important that A-T mentions is the fact that all these bonds are tradable in what is known as The Secondary Market. The price does go up and down and this changes the interest rate of the bond.
This is how it works. The repayment each month stays the same so if the price of the bond falls then the interest rate rises. Say at day one a million is borrowed for 10 years and each year 100000 is repaid. Without a calculator say this is 9%. The 100000 figure is not going to change unless it defaults. If the risk of default rises as A-T says people will sell these bonds. A bond starts off with a value of a hundred so after a bad sell off the price is 90. So now the entire 1million bond can be bought for 900000 but due to the fact that the payout is still 100000 a year the interest rate is now about 10%

It is important to understand how the credit markets set interest rates in this fashion. Bond market up means interest rates are falling and a bond market selloff means interest rates are rising.
When I say that a dollar collapse would send interest rates skyrocketing this is the effect I am talking about as US Treasury Bonds would be sold like crazy.

The Federal Reserve do not set the interest rates on anything except overnight loans called The Fed Funds Rate. This is defined as the interest rate charged for overnight loans between the banks themselves when they temporarily need funds to avoid going below mandated levels. They also set The Discount Rate which is the rate that a bank must pay to the Fed when they borrow directly from the Fed to get over a crunch. The rules of who can go to The Discount Window and the collatoral required have changed recently.

Over the last few days interest rates have fallen quite a bit

youngdan wrote:

It is important to understand how the credit markets set interest rates in this fashion. Bond market up means interest rates are falling and a bond market selloff means interest rates are rising.
When I say that a dollar collapse would send interest rates skyrocketing this is the effect I am talking about as US Treasury Bonds would be sold like crazy.

The Federal Reserve do not set the interest rates on anything except overnight loans called The Fed Funds Rate. This is defined as the interest rate charged for overnight loans between the banks themselves when they temporarily need funds to avoid going below mandated levels. They also set The Discount Rate which is the rate that a bank must pay to the Fed when they borrow directly from the Fed to get over a crunch. The rules of who can go to The Discount Window and the collatoral required have changed recently.

Over the last few days interest rates have fallen quite a bit

And one of the oddities of recent financial history is how low those interest rates got. They were at 50 year lows at one stage back a few years, though they did rise sharply since last August.

The analogy to a mortgage is useful but should be taken in its context. A bond is very different to a mortgage. In situations other than those concerning registered land a mortgage transfers title in the land to the bank. Therefore, rather for most people who have a mortgage, than the bank having an IOU, they have your actual house until redemption of the mortgage.

You would have a better understanding of the legal side of things. As far as I am concerned though the bank would look upon the bond/loan/mortage as an asset and this is where the selling on of this asset comes into play. I mentioned the court case in Illinois.
The crux of the matter was that the buyers of the bundled mortages were proving that the origonal mortages were fraudilant due to no income verification and fraudilant apprasals etc. This would mean that the selling of fraudilant bundled mortages would also be fraudilant. These securitized mortages had dropped in value and now the buyers were about to be able to force the banks to buy them back at face value and this would bankrupt the banks. So legislation to pretect the banks wasstuck onto a bill in congress.

Johnfas means that the bank can take your house but the Chinese shouldn't be able to take your country or one of your cities if there is a bond default .. ?

Auditor #9 wrote:

Johnfas means that the bank can take your house but the Chinese shouldn't be able to take your country or one of your cities if there is a bond default .. ?

Well, they can have an influence on your fiscal and monetary policy to ensure that they get their money back.

They only have influece while the US milks it to a finish. Then they can screw.

youngdan wrote:

They only have influece while the US milks it to a finish. Then they can screw.

Well, the US is a special case since its currency is the world's reserve currency.

youngdan wrote:

You would have a better understanding of the legal side of things. As far as I am concerned though the bank would look upon the bond/loan/mortage as an asset and this is where the selling on of this asset comes into play. I mentioned the court case in Illinois.
The crux of the matter was that the buyers of the bundled mortages were proving that the origonal mortages were fraudilant due to no income verification and fraudilant apprasals etc. This would mean that the selling of fraudilant bundled mortages would also be fraudilant. These securitized mortages had dropped in value and now the buyers were about to be able to force the banks to buy them back at face value and this would bankrupt the banks. So legislation to pretect the banks wasstuck onto a bill in congress.

As I remember legislation was also passed to make it more difficult for a householder to default on a loan - even when people are bankrupt and have lost their houses they are still liable indefinitely to repay the loan and interest in full.

They will milk that happy fact for as long as possible.

That legislation was at a different time and it did make it difficult. However some states like Florida have Homestead Acts where you house is protected from creditors. All the crooks live in Florida for this reason. O J Simpson for example. I don't know much on legal matters though

I am very much in favour of people being able to seek bankruptcy and start again with a clean slate. Everyone makes mistakes and should have an opportunity to start again. Those lending should take due care. Not sure that I would go as far as Florida though.

Don't pay any attention to where it says coupon, instead look to the right where it says current price/yield. This is what changes not the coupon which stays the same. Take the 10 year. You will see that the price is 106 and 12/32. That means it has increased in price from the moment it was auctioned by 6 and 12 32seconds. So a buyer who bought and held from day 1 is up about 6.5%. Now look and it says the yield is 2.99%. Remember the yield goes down as the price goes up.

The last column shows the difference between today and yesterday. It tells you the price fell by 22/32 which means the interest rate rose by 0.08%.

The 3.75 which you circled is the interest rate on the auction day which was 3.75% which is what the government pays and this dollar amount does not change.

You can see that the interest rates are higher as the durations get longer out to 30 years. This is nearly always the case. However on very rare occasions the interest rates are higher close in. This would be known as An Inverted Yield Curve. It is always a sign of a recession or trouble ahead and it happened about a year ago to give all market watchers a sign for the future

Some posts from Weather thread merged to this one.

Phwoarr... can someone put Danny Craig up there too?? Pretty please!

EvotingMachine0197 wrote:

Auditor posted this cool diagram from the BBC yesterday.



I can follow the diagram ok, and I think it's a good one.
My question though is what is a bond market, or what is a bond ? I can't seem to get my head around that.

And while you're at it, what is a gilt.

That is quite helpful... so what exactly happened in this structure to cause the collapse? Did people stop buying bonds? Is the structure an inherently unstable one or was it a victim of circumstance, for example the property bubble?

youngdan wrote:

They will milk that happy fact for as long as possible.

That legislation was at a different time and it did make it difficult. However some states like Florida have Homestead Acts where you house is protected from creditors. All the crooks live in Florida for this reason. O J Simpson for example. I don't know much on legal matters though

I've put land law aside lately to focus on other subjects but I know that mortgages are only the latest development in the long struggle of creditors to enforce debts and other obligations against debtors. Traditionally the courts and various legislatures have been very reluctant to allow people to lose their homes through default on loans and various devices of claiming such assets have been developed by creditors and their lawyers only to be frustrated in the courts and through legislation.

Quote :

That is quite helpful... so what exactly happened in this structure to cause the collapse? Did people stop buying bonds? Is the structure an inherently unstable one or was it a victim of circumstance, for example the property bubble?

It looks like investment crossed with gambling - they win, they win big, they lose, they should lose big.

But they were too big to fail so now everyone's losing.

I think I've some way to go before understanding the actual bond market, and this talk about interest rates and yields. It makes sense in theory but I'm having trouble piecing it all together in my head. It's probably just the wrong time of day for it.

Interest rate and yield are the same thing but it does take a bit of thought to follow how the interest rate changes. It is worth the effort though as it is so important. For example mortage rates are rising here slightly and it is surprising to many as all they hear on the TV is interest rates being dropped

youngdan has left the planet/building has he ?


Some news from Russia Today - Russia has become the fifth largest creditor to the U.S. -


(watch it here)

Russia has become the 5th largest U.S. creditor, after upping its investment in U.S. Treasury bills to more than $116 Billion. But the deteriorating economic situation in the U.S may is leading (sic) to longer term concerns.
...
“U.S. Treasury bonds are being bought by people all over the world, not because they are good returns but because they are the least bad assets around. You can’t put your money anywhere safer than that I think, so I think, moreover, it’s the most liquid asset around, the most easily sellable and tradable. So I think it’s a very useful one for Russia to have at the moment.”

Experts say U.S. Treasuries have no risk of default, as the United States is the only country in the world with a foreign debt denominated in its own currency. However Americas massive liquidity injections may lead to inflation, and cause creditor nations to lose interest in T Bills.

....

http://www.russiatoday.com/Business/2009-03-04/Russia_buys_up_big_on_U.S._Treasuries__despite_longer_term_doubts.html



http://en.wikipedia.org/wiki/Treasury_security