6 ms·

Can somebody ELI5?

by verroq 11y ago

Can somebody ELI5?

mynegation 11y ago
Basically a regime of very low interest rates alongside tighter regulatory requirements creates things that haven't been seen before. Negative swap spreads for example mean that investors consider credit risk of swaps lower than US treasuries, which are supposed to be the golden unattainable standard of safety. The reason for that is that swaps are collateralized, that is counterparties in a swap are obliged to give each other money they are owing pretty much each day so you are on the hook just for 1 day market movement. Not so with treasuries and faith in US treasury seem to down. Negative corporate bond inventories happened because new rules make it very burdensome for banks to hold corporate bonds because of reserve capital requirements. So bank sell their inventories and because there are many non-banking financial institutions that seem to have an appetite for corporate bonds, banks sell even more bonds than they have (being "short"). For the same reason synthetic credit is popular. Instead if holding an asset (corporate bond in this case) you recreate synthetic position with derivatives. For example, if you buy a right to buy a bond at a certain price and at the same time sell a right to sell a bond at the same price, it is essentially the same as if you bought a bond (bond forward strictly speaking, but we will omit the difference here).
- deleted 11y ago
  [deleted]
- dsjoerg 11y ago
  Have you ever met a five year old?
  - meric 11y ago
    The explanation for 5 year old would be, the adults are doing things they have never done before, so they see things they never seen before. And things people never seen before are often considered strange.
    - swiley 11y ago
      Sounds like a furry orgie.
  - mynegation 11y ago
    OK, I'll bite. Imagine your mom gives you cookies and everyone in your school is willing to exchange cookies for other nice things. Lately your mom was giving you so many cookies that you accumulated lots of them. Your friends now come to you to borrow cookies more willingly than to your mom, despite her historically being more respectable cookie provider, just because she might not have too many left now. At the same time you friend Tom opened a lemonade stand. He sells cookies with lemonade and this combo sells especially well. He wants to borrow cookies from you, promising he will sell a lot of stuff an then will buy and return more cookies than he borrowed to you (interest). You see that lemonade stand does very well and you want to do it yourself. But unfortunately your mom forbids you to do so. So you do next best thing: you give Tom all of your cookies, and then some more that you - in turn - borrowed from mom and other friends, hoping that Tom will turn them around and return even more cookies to you.
    - rushabh 11y ago
      Brilliant! That just made me realize that borrowing creates surplus which in turn creates larger and deeper networks. That works really well for everyone if supply and demand are stable and no one gets very greedy. But if not, then things can go bad for everyone. For example if Tom's stall does not work well, then the "cookie crumbles". Your mom, of course, being your mom will still give you cookies, no matter you did not make wise decisions earlier and you will still hold on to your incumbent position as a cookie distributor even though you don't deserve it anymore. This goes on for a while, till people don't want your mom's cookies anymore because, all their moms have also started distributing cookies generously. Then a new kid comes to your neighbourhood with an exciting new flavor of cookies and suddenly it seems cool to be having those cookies. Your mom, obviously does not like it and tries to out-law or regulate those cookies. But then, the train has already left the station.
      - xseven 11y ago
        new flavor? did you just hint at Bitcoin
      - RobertoG 11y ago
        "Your mom, obviously does not like it and tries to out-law or regulate those cookies. But then, the train has already left the station." That couldn't happen while your are living at your mom's house. Just remember that your mom doesn't accept any other kind of cookies for paying taxes. OK.. maybe we stretched the metaphor a little too much there.
  - ubernostrum 11y ago
    To be fair, in the context of reddit where it became a thing, the ELI5 subreddit defines the term as meaning layperson-accessible explanations, not patronizing "treat the asker like a literal five-year-old child" explanations.

Can somebody ELI5?

by verroq 11y ago

Can somebody ELI5?

Basically a regime of very low interest rates alongside tighter regulatory requirements creates things that haven't been seen before. Negative swap spreads for example mean that investors consider credit risk of swaps lower than US treasuries, which are supposed to be the golden unattainable standard of safety. The reason for that is that swaps are collateralized, that is counterparties in a swap are obliged to give each other money they are owing pretty much each day so you are on the hook just for 1 day market movement. Not so with treasuries and faith in US treasury seem to down. Negative corporate bond inventories happened because new rules make it very burdensome for banks to hold corporate bonds because of reserve capital requirements. So bank sell their inventories and because there are many non-banking financial institutions that seem to have an appetite for corporate bonds, banks sell even more bonds than they have (being "short"). For the same reason synthetic credit is popular. Instead if holding an asset (corporate bond in this case) you recreate synthetic position with derivatives. For example, if you buy a right to buy a bond at a certain price and at the same time sell a right to sell a bond at the same price, it is essentially the same as if you bought a bond (bond forward strictly speaking, but we will omit the difference here).

deleted 11y ago
[deleted]
dsjoerg 11y ago
Have you ever met a five year old?
- meric 11y ago
  The explanation for 5 year old would be, the adults are doing things they have never done before, so they see things they never seen before. And things people never seen before are often considered strange.
  - swiley 11y ago
    Sounds like a furry orgie.
- mynegation 11y ago
  OK, I'll bite. Imagine your mom gives you cookies and everyone in your school is willing to exchange cookies for other nice things. Lately your mom was giving you so many cookies that you accumulated lots of them. Your friends now come to you to borrow cookies more willingly than to your mom, despite her historically being more respectable cookie provider, just because she might not have too many left now. At the same time you friend Tom opened a lemonade stand. He sells cookies with lemonade and this combo sells especially well. He wants to borrow cookies from you, promising he will sell a lot of stuff an then will buy and return more cookies than he borrowed to you (interest). You see that lemonade stand does very well and you want to do it yourself. But unfortunately your mom forbids you to do so. So you do next best thing: you give Tom all of your cookies, and then some more that you - in turn - borrowed from mom and other friends, hoping that Tom will turn them around and return even more cookies to you.
  - rushabh 11y ago
    Brilliant! That just made me realize that borrowing creates surplus which in turn creates larger and deeper networks. That works really well for everyone if supply and demand are stable and no one gets very greedy. But if not, then things can go bad for everyone. For example if Tom's stall does not work well, then the "cookie crumbles". Your mom, of course, being your mom will still give you cookies, no matter you did not make wise decisions earlier and you will still hold on to your incumbent position as a cookie distributor even though you don't deserve it anymore. This goes on for a while, till people don't want your mom's cookies anymore because, all their moms have also started distributing cookies generously. Then a new kid comes to your neighbourhood with an exciting new flavor of cookies and suddenly it seems cool to be having those cookies. Your mom, obviously does not like it and tries to out-law or regulate those cookies. But then, the train has already left the station.
    - xseven 11y ago
      new flavor? did you just hint at Bitcoin
    - RobertoG 11y ago
      "Your mom, obviously does not like it and tries to out-law or regulate those cookies. But then, the train has already left the station." That couldn't happen while your are living at your mom's house. Just remember that your mom doesn't accept any other kind of cookies for paying taxes. OK.. maybe we stretched the metaphor a little too much there.
- ubernostrum 11y ago
  To be fair, in the context of reddit where it became a thing, the ELI5 subreddit defines the term as meaning layperson-accessible explanations, not patronizing "treat the asker like a literal five-year-old child" explanations.