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"* In a rising interest rate environment, all bond purchases will prove unwise, since the investor could have earned a higher rate by waiting a bit longer. * I

"* In a rising interest rate environment, all bond purchases will prove unwise, since the investor could have earned a higher rate by waiting a bit longer. * In a falling interest rate environment, all bond selling (issuance) will prove unwise, because the issuer could have paid a lower rate by waiting a bit longer." Not quite. Bond prices incorporate future expectations of real rates and inflation rates and then also associated risk premiums. Thus, a bond purchase will lose money only if realized rates come in higher than what is already discounted. That is, it is possible for short term rates to rise, and yet a bond increases in value (i.e., because the ST rates came in lower than what was already assumed in the bond).

runeks 9y ago
> Bond prices incorporate future expectations of real rates and inflation rates and then also associated risk premiums. Thus, a bond purchase will lose money only if realized rates come in higher than what is already discounted. Isn’t the fact that bond interest rates falling for the past ~35 years — on a 5-year average — then a testament to the market being unable to predict future interest and inflation rates? If the market were able to correctly predict future interest and inflation rates, the rate of interest wouldn’t change. So, as far as I can see, the fact that it has been dropping, on average, for the past three decades seems to indicate that the market fails at this prediction under our current monetary system. Or, perhaps a better question: if the rate of inflation were to slowly increase by one percentage point per year, for the next 30 years, what would be the right real rate of interest right now — assuming we knew this were going to happen? In other words: how do you discount a rate that’s slowly but steadily changing (even if it’s in a known direction)? With regards to short term rates, I should have explicitly written “the long/bond rate of interest” since the two indeed are fairly independent.
- tensor_rank_0 9y ago
  > if the rate of inflation were to slowly increase by one percentage point per year, for the next 30 years, what would be the right real rate of interest right now — assuming we knew this were going to happen? the rate would increase exponentially according to the number of days between the present and the maturity date. the rate for securities that could be redeemed on demand would steadily increase, but represent the lowest rate (because you would always have the option to decide to claim your money). whereas a 30 year cd would have the highest rate in the market.

runeks 9y ago

> Bond prices incorporate future expectations of real rates and inflation rates and then also associated risk premiums. Thus, a bond purchase will lose money only if realized rates come in higher than what is already discounted. Isn’t the fact that bond interest rates falling for the past ~35 years — on a 5-year average — then a testament to the market being unable to predict future interest and inflation rates? If the market were able to correctly predict future interest and inflation rates, the rate of interest wouldn’t change. So, as far as I can see, the fact that it has been dropping, on average, for the past three decades seems to indicate that the market fails at this prediction under our current monetary system. Or, perhaps a better question: if the rate of inflation were to slowly increase by one percentage point per year, for the next 30 years, what would be the right real rate of interest right now — assuming we knew this were going to happen? In other words: how do you discount a rate that’s slowly but steadily changing (even if it’s in a known direction)? With regards to short term rates, I should have explicitly written “the long/bond rate of interest” since the two indeed are fairly independent.

tensor_rank_0 9y ago
> if the rate of inflation were to slowly increase by one percentage point per year, for the next 30 years, what would be the right real rate of interest right now — assuming we knew this were going to happen? the rate would increase exponentially according to the number of days between the present and the maturity date. the rate for securities that could be redeemed on demand would steadily increase, but represent the lowest rate (because you would always have the option to decide to claim your money). whereas a 30 year cd would have the highest rate in the market.