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The idea that bond investors only care about "short-term solvency" and therefore ignore unfunded pension obligations doesn't make any sense at all. I don't even

by dnomad 8y ago

The idea that bond investors only care about "short-term solvency" and therefore ignore unfunded pension obligations doesn't make any sense at all. I don't even... Also this idea that California, the 5th largest economy in the world, is ranked "11th nationally" in terms of debt ratings doesn't make any sense. Nobody actually compares an economy like California (GDP 2.5T) with Arizona (GDP 2.5B). There's so much wrong here -- from the pure ideological nonsense that California is "on the verge of bankruptcy" to the idea that bond investors only think 6-10 years into the future -- that it's really not worth continuing this conversation. (It's also quite clear that the legion of downvoters, hard pressed to actually defend their ideological nonsense, can always just suppress the facts. So much for free speech uber alles.)

tptacek 8y ago
That's literally what a bond rating measures: whether a particular bond is likely to be repaid. A short-term bond is generally anything that comes to maturity before one year, and long-term is anything else.
- dnomad 8y ago
  > short-term bond is generally anything that comes to maturity before one year, and long-term is anything else. Yeah that's now how any of this works. First, average muni bonds duration is 10+ years. Short-term debt is inherently safer than long-term debt but all investors will look far beyond a particular bond. Especially when dealing with sovereign entities who can't go bankrupt they are much more concerned about the risk of default (on anything, not just bonds). That's actually what the credit ratings measures -- a comprehensive evaluation of ability to service all debts. They are not at all bond-specific. Logically, if investors really did believe these states were doomed then they would also be forced to conclude that the states themselves know they are doomed (all information is public) and at any moment the states will take measures before they are destroyed to prevent their own destruction. These measures will inevitably be some form of default. So if you're lending money to an entity who everybody knows will default at some point in the future it would be naive to think any one particular debt instrument is safe. Defaults, by their very nature, are very unpredictable. That's why investors will demand a real risk premium even for extremely short-term debt (30 days) from borrowers with low credit ratings. This isn't economic theory btw, this is economic fact, supported by two centuries of market data. Suffice to say, Cali and NY bonds are actually set to out perform so the market does not believe that either state is going to default in the next 10 years or even the next 30 years.
  - tptacek 8y ago
    Bond ratings are assigned to individual bonds.

by dnomad 8y ago

tptacek 8y ago

That's literally what a bond rating measures: whether a particular bond is likely to be repaid. A short-term bond is generally anything that comes to maturity before one year, and long-term is anything else.

dnomad 8y ago
> short-term bond is generally anything that comes to maturity before one year, and long-term is anything else. Yeah that's now how any of this works. First, average muni bonds duration is 10+ years. Short-term debt is inherently safer than long-term debt but all investors will look far beyond a particular bond. Especially when dealing with sovereign entities who can't go bankrupt they are much more concerned about the risk of default (on anything, not just bonds). That's actually what the credit ratings measures -- a comprehensive evaluation of ability to service all debts. They are not at all bond-specific. Logically, if investors really did believe these states were doomed then they would also be forced to conclude that the states themselves know they are doomed (all information is public) and at any moment the states will take measures before they are destroyed to prevent their own destruction. These measures will inevitably be some form of default. So if you're lending money to an entity who everybody knows will default at some point in the future it would be naive to think any one particular debt instrument is safe. Defaults, by their very nature, are very unpredictable. That's why investors will demand a real risk premium even for extremely short-term debt (30 days) from borrowers with low credit ratings. This isn't economic theory btw, this is economic fact, supported by two centuries of market data. Suffice to say, Cali and NY bonds are actually set to out perform so the market does not believe that either state is going to default in the next 10 years or even the next 30 years.
- tptacek 8y ago
  Bond ratings are assigned to individual bonds.