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Creditors definitely do lose money when they price debt at 2% but inflation runs at 7%. Talking about mortgages misses the larger fixed rate bond market (gover

by lesam 4y ago

Creditors definitely do lose money when they price debt at 2% but inflation runs at 7%. Talking about mortgages misses the larger fixed rate bond market (government and company long term debt).

helen___keller 4y ago
Yes but what I’m saying is all fixed rate debt prices in interest rate risk. Any one creditor could be in a bad spot, but a creditor holding lots of fixed rate debt can / should be hedging against that risk. When we’re talking about institutions with billions of dollars (and not joe lending Bobby $20), I wouldn’t call them a loser unless they specifically failed to properly hedge their positions.
- lesam 4y ago
  How would you hedge interest rate risk on trillions of dollars in US treasuries? Who takes the other side of that trade, and why? I don’t think that sort of hedge exists.
  - onlyrealcuzzo 4y ago
    Isn't this the point of TIPS?
  - helen___keller 4y ago
    I don’t really know what specifically you’re referring to. I’m not aware of anybody trying to hedge trillions in treasuries in one trade. I’m not aware of anybody even holding trillions in treasuries except maybe a few foreign countries. Hedging is done at the portfolio level using derivatives. This allows you to move your unwanted exposure to interest rate risk (or just about any kind of risk) to someone else in exchange for a premium. Whoever is taking that risk off your hands probably has a more diverse portfolio and wants the premium (ie their risk profile is different). In this manner, large fixed-rate creditors shouldn’t be largely exposed to rising interest rates, because they’ve been hedging that risk all along.
- geoduck14 4y ago
  This makes me wonder if Fannie Mae and Freddie Mac have hedged all of the fixed rate mortgages they have lent money for.
  - helen___keller 4y ago
    I don’t know about “all”, but Fannie and Freddie do indeed trade derivatives as part of risk management

by lesam 4y ago

Creditors definitely do lose money when they price debt at 2% but inflation runs at 7%. Talking about mortgages misses the larger fixed rate bond market (government and company long term debt).

helen___keller 4y ago

Yes but what I’m saying is all fixed rate debt prices in interest rate risk. Any one creditor could be in a bad spot, but a creditor holding lots of fixed rate debt can / should be hedging against that risk. When we’re talking about institutions with billions of dollars (and not joe lending Bobby $20), I wouldn’t call them a loser unless they specifically failed to properly hedge their positions.

lesam 4y ago
How would you hedge interest rate risk on trillions of dollars in US treasuries? Who takes the other side of that trade, and why? I don’t think that sort of hedge exists.
- onlyrealcuzzo 4y ago
  Isn't this the point of TIPS?
- helen___keller 4y ago
  I don’t really know what specifically you’re referring to. I’m not aware of anybody trying to hedge trillions in treasuries in one trade. I’m not aware of anybody even holding trillions in treasuries except maybe a few foreign countries. Hedging is done at the portfolio level using derivatives. This allows you to move your unwanted exposure to interest rate risk (or just about any kind of risk) to someone else in exchange for a premium. Whoever is taking that risk off your hands probably has a more diverse portfolio and wants the premium (ie their risk profile is different). In this manner, large fixed-rate creditors shouldn’t be largely exposed to rising interest rates, because they’ve been hedging that risk all along.
geoduck14 4y ago
This makes me wonder if Fannie Mae and Freddie Mac have hedged all of the fixed rate mortgages they have lent money for.
- helen___keller 4y ago
  I don’t know about “all”, but Fannie and Freddie do indeed trade derivatives as part of risk management