8 ms·

The collapse in Treasury bonds now ranks among worst market crashes in history

55 points by strict9 3y ago

jfengel 3y ago
I always have a hard time keeping track of what goes up and what goes down with bonds, so writing this down mostly for myself: The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate. (In between Treasury sales, there's an open market of people selling their bonds to each other, which hints at what the Treasury will pay next time.) So a price crash means that the bonds are cheaper, which means that the Fed will get less money when they sell the bonds. It means that interest rates are higher, costing the Federal government more money for the same amount of debt. The Federal Reserve has its own interest rate, which in turn sets the rates that other banks will require for loans. They set that high when inflation is high, which encourages selling Treasury bonds in favor of other things. Inflation had been cooling but is still above target, and for the last few months the cooling had stopped. It doesn't help that the US government has had to sell a lot of its bonds lately, i.e. the debt is going up quickly. That too is tied to things like inflation, as well as the war in Ukraine. So... higher prices on stuff lead to a sell-off of bonds, raising interest rates. OK, I think I understand all that.
- pcdoodle 3y ago
  My question: Who isn't holding the bag in this climate?
  - great_psy 3y ago
    Rich people woo don’t have any debt and can scoop things up for cheap
    - lumost 3y ago
      Messing with the money supply hits it’s natural end? Leave interest rates low - inflation burns up asset prices. Run high? Asset prices fall as NPV values future cash flows less. At some point we have to fix structural economic problems without the money printer.
      - great_psy 3y ago
        How can we fix the problem without the money printer ? There’s so much debt, individuals, corporations and governments are all deep in debt. We can just pretend the debt does not exist (restructuring) but that’s pretty much the same as printing that amount of money, just done in a different way. The only non-printer way is to get some sort of exponential productivity gain. Maybe if we get the absolutely best case for AI that could give the productivity gains we need. Obviously assuming the benefits of AI are shared in an equitable way.
    - gruez 3y ago
      Rich people aren't storing their wealth by hoarding cash. They're investing in bonds/stocks, both of which are taking a beating.
    - reqqqles 3y ago
      How rich are you talking? If I have 50K to invest, what am I supposed to be scooping?
      - great_psy 3y ago
        You could scoop up some bonds yielding 5-10% depending on your risk tolerance. Could wait for stock market to drop (if it a happens) and grab some of your favorite companies for cheaper
  - injeolmi_love 3y ago
    Right now? Short term t bill holders. They rollover so fast that interest rate hikes don’t affect the principle, since you just wait for them to expire then immediately grab the new higher interest rate. Tether (issues usdt) is winning big right now because they mostly hold short term t bills.
    - user_named 3y ago
      Principal
    - astrange 3y ago
      > Tether (issues usdt) is winning big right now because they mostly hold short term t bills. Well, they claim to. Since Tether is officially sitting on a giant money printer, their best strategy is to do absolutely nothing but count their money. So insofar as they're doing anything else it suggests they're lying.
      - injeolmi_love 3y ago
        In order to maximize cash flows, Tether has an incentive to grow the wider crypto ecosystem. Matt Levine wrote an excellent explanation in one of his recent “Money Matters” newsletters. After the BUSD debacle, it’s clear that onshore and regulated reserves for stablecoins are a huge risk for defi dapps built on top of them. US policy regarding USDC and other such US regulated stablecoins are at risk of change at any time. Since well designed defi dapps are not upgradeable, future policy risks must be considered when choosing which stablecoin to utilize. USDT’s offshore and opaque balance sheet is proven safer for defi dapps than US regulated stablecoins. I wish this weren’t the case, but it’s proven in practice.
  - balderdash 3y ago
    It’s not as bad as it sounds if you’re an unlevered hold to maturity investor. If you bought a 10 year treasury 2 years ago at a rate of return you found acceptable, you’re still going to earn that return (actually a little better), but you are just looking at a mark to market loss that will resolve itself over the next 8 years.
    - nly 3y ago
      Except you're being hammered by inflation and you can't get out to invest anything else because of the market loss.
      - balderdash 3y ago
        Read the comment - hold to maturity, acceptable rate of return at investment
        prepend 3y ago
        Hold to maturity investors change when inflation shifts so much. Someone may have bought 10 year 2% notes intending to hold to maturity because they thought inflation would stay at 1% and they just wanted to park cash. But with inflation at 3-5% they now need to dump and buy something else. People change their tactics to achieve their strategy.
        balderdash 3y ago
        Except I picked two years ago for a reason. Inflation was like 6.x%, today it’s like 3.x%…
        user_named 3y ago
        Still wrong
        user_named 3y ago
        The rate of return is no longer acceptable
  - naveen99 3y ago
    Labor
- adamredwoods 3y ago
  >> The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate. I don't understand this part.
  - dragonwriter 3y ago
    > >> The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate. > I don’t understand this part. With some simplified numbers: if the Treasury sells a bond that matures in 1 year and costs $100, and it is purchased at auction for $80, then it has an effective interest rate of 25%, because for each $1 the Treasury got selling the loan, it will pay $0.25 in interest in one year, as well as paying back the principal.
    - yieldcurvepro 3y ago
      The treasury auctions T-Bills (bonds with 1 year or less to maturity) at a discount and that's how you get the "yield" so technically they don't pay interest. For example, if you were to buy a 1 year today, you would purchase it for $94.84 and the Treasury would redeem it at maturity for $100. That's you receive the current yield of 5.43%.
  - donavanm 3y ago
    The OP is confusing things a bit by conflating "yield to maturity" with "interest rate." Yield to maturity is the total return for the bond holder if they hold until it matures. That includes market/auction price, par (redemption) value, periodic coupon or fixed interest payments, and the time to mature. Expressed as a percentage thats "yield rate." That total yield rate will fluctuate on the secondary market based current prices or initial competitive auction prices. In short, for holding bonds you almost definitely care about total YTM and not the face coupon/interest rate.
    - londons_explore 3y ago
      It really feels like a system that could be simplified while all parties still get the financial effects they desire.
- bandyaboot 3y ago
  > It doesn't help that the US government has had to sell a lot of its bonds lately, i.e. the debt is going up quickly. That too is tied to things like inflation, as well as the war in Ukraine. Sure, in absolute terms the debt is going up quickly as it has for the past couple decades. But, in relative terms over that period, the current rate of increase is pretty average. Also, I’m honestly curious what you’re referring to with the specific inclusion of the Ukraine war. Its effect on the rate of increase in the US debt is virtually nothing.
  - webninja 3y ago
    It’s $75 Billion not $75 million. The debt has grown so high now that 15% of all US government revenues go towards interest on the debt. Up from 7% when I was in college. How high does the debt have to grow before the country and government collapse? Better to advise the World Bank and the IMF to loan them money if that’s not happening already..
    - bandyaboot 3y ago
      $75 billion is about 2% of the debt increase since the war began and most of that hasn’t come in a form that would have affected the debt number yet. Some of it can’t properly be said to affect the debt at all such as giving them military equipment for which we had already allocated funds to replace. I won’t bother responding to anything beyond your first sentence since it doesn’t appear to be a response to anything I wrote.
    - astrange 3y ago
      > How high does the debt have to grow before the country and government collapse? The absolute amount doesn't necessarily matter, because if you own the bonds then you're paying the debt to yourself. Other factors are a) who owns them b) what the interest rate is c) what currency they're in. The usual problem for smaller countries is when they owe debt in foreign currencies. Also note that long term interest rates would be very high if the market thought there was a hyperinflation risk, and they aren't.
    - csomar 3y ago
gizmo 3y ago
Banks, pension funds, municipalities, retirees. A lot of folks are sitting on very significant losses. The bond market is much larger than the stock market, and that means that this is very significant. There are other indicators that trouble is afoot. Credit default swaps spiking for regional banks. Big discordance between stock performance and bond performance. Prolonged and significant yield curve inversion. Either bonds must go up or stocks must go down. Hard to predict which way this will resolve, but I don't see the Fed intervening unless the situation gets truly dire.
- thoughtstheseus 3y ago
  Defined benefit pensions do not mind higher rates. They use 6-8% discount rates for their known cash liabilities and can nearly fully immunize their portfolios with government bonds today. That’s maybe $1 trillion of capital converting into coupon bonds soonish.
olliej 3y ago
"It looks like you're using an ad blocker" And it looks like you're spying on me. These sites need to stop pretending that there isn't a cost to their users.
riku_iki 3y ago
guys decided to buy bonds with nearly 0 interest rate and now surprised they lose value when rate is 5% and inflation 10%..
- rswail 3y ago
  Except the current US inflation rate is ~3-4%.
  - riku_iki 3y ago
    that's what their bonds are losing in addition to previous high inflation rates.
tracker1 3y ago
It's as if just printing trillions with a two trillion dollar deficit while also raising interest rates with record inflation doesn't inspire confidence or something.
- Guvante 3y ago
  Confidence? The article is explicit that everyone thinks future bonds will have higher interest rates. This isn't a "we don't think these will mature" this is "we think future bonds will have higher interest rates."

55 points by strict9 3y ago

I always have a hard time keeping track of what goes up and what goes down with bonds, so writing this down mostly for myself: The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate. (In between Treasury sales, there's an open market of people selling their bonds to each other, which hints at what the Treasury will pay next time.) So a price crash means that the bonds are cheaper, which means that the Fed will get less money when they sell the bonds. It means that interest rates are higher, costing the Federal government more money for the same amount of debt. The Federal Reserve has its own interest rate, which in turn sets the rates that other banks will require for loans. They set that high when inflation is high, which encourages selling Treasury bonds in favor of other things. Inflation had been cooling but is still above target, and for the last few months the cooling had stopped. It doesn't help that the US government has had to sell a lot of its bonds lately, i.e. the debt is going up quickly. That too is tied to things like inflation, as well as the war in Ukraine. So... higher prices on stuff lead to a sell-off of bonds, raising interest rates. OK, I think I understand all that.

pcdoodle 3y ago
My question: Who isn't holding the bag in this climate?
- great_psy 3y ago
  Rich people woo don’t have any debt and can scoop things up for cheap
  - lumost 3y ago
    Messing with the money supply hits it’s natural end? Leave interest rates low - inflation burns up asset prices. Run high? Asset prices fall as NPV values future cash flows less. At some point we have to fix structural economic problems without the money printer.
    - great_psy 3y ago
      How can we fix the problem without the money printer ? There’s so much debt, individuals, corporations and governments are all deep in debt. We can just pretend the debt does not exist (restructuring) but that’s pretty much the same as printing that amount of money, just done in a different way. The only non-printer way is to get some sort of exponential productivity gain. Maybe if we get the absolutely best case for AI that could give the productivity gains we need. Obviously assuming the benefits of AI are shared in an equitable way.
  - gruez 3y ago
    Rich people aren't storing their wealth by hoarding cash. They're investing in bonds/stocks, both of which are taking a beating.
  - reqqqles 3y ago
    How rich are you talking? If I have 50K to invest, what am I supposed to be scooping?
    - great_psy 3y ago
      You could scoop up some bonds yielding 5-10% depending on your risk tolerance. Could wait for stock market to drop (if it a happens) and grab some of your favorite companies for cheaper
- injeolmi_love 3y ago
  Right now? Short term t bill holders. They rollover so fast that interest rate hikes don’t affect the principle, since you just wait for them to expire then immediately grab the new higher interest rate. Tether (issues usdt) is winning big right now because they mostly hold short term t bills.
  - user_named 3y ago
    Principal
  - astrange 3y ago
    > Tether (issues usdt) is winning big right now because they mostly hold short term t bills. Well, they claim to. Since Tether is officially sitting on a giant money printer, their best strategy is to do absolutely nothing but count their money. So insofar as they're doing anything else it suggests they're lying.
    - injeolmi_love 3y ago
      In order to maximize cash flows, Tether has an incentive to grow the wider crypto ecosystem. Matt Levine wrote an excellent explanation in one of his recent “Money Matters” newsletters. After the BUSD debacle, it’s clear that onshore and regulated reserves for stablecoins are a huge risk for defi dapps built on top of them. US policy regarding USDC and other such US regulated stablecoins are at risk of change at any time. Since well designed defi dapps are not upgradeable, future policy risks must be considered when choosing which stablecoin to utilize. USDT’s offshore and opaque balance sheet is proven safer for defi dapps than US regulated stablecoins. I wish this weren’t the case, but it’s proven in practice.
- balderdash 3y ago
  It’s not as bad as it sounds if you’re an unlevered hold to maturity investor. If you bought a 10 year treasury 2 years ago at a rate of return you found acceptable, you’re still going to earn that return (actually a little better), but you are just looking at a mark to market loss that will resolve itself over the next 8 years.
  - nly 3y ago
    Except you're being hammered by inflation and you can't get out to invest anything else because of the market loss.
    - balderdash 3y ago
      Read the comment - hold to maturity, acceptable rate of return at investment
      - prepend 3y ago
        Hold to maturity investors change when inflation shifts so much. Someone may have bought 10 year 2% notes intending to hold to maturity because they thought inflation would stay at 1% and they just wanted to park cash. But with inflation at 3-5% they now need to dump and buy something else. People change their tactics to achieve their strategy.
        balderdash 3y ago
        Except I picked two years ago for a reason. Inflation was like 6.x%, today it’s like 3.x%…
        user_named 3y ago
        Still wrong
      - user_named 3y ago
        The rate of return is no longer acceptable
- naveen99 3y ago
  Labor
adamredwoods 3y ago
>> The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate. I don't understand this part.
- dragonwriter 3y ago
  > >> The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate. > I don’t understand this part. With some simplified numbers: if the Treasury sells a bond that matures in 1 year and costs $100, and it is purchased at auction for $80, then it has an effective interest rate of 25%, because for each $1 the Treasury got selling the loan, it will pay $0.25 in interest in one year, as well as paying back the principal.
  - yieldcurvepro 3y ago
    The treasury auctions T-Bills (bonds with 1 year or less to maturity) at a discount and that's how you get the "yield" so technically they don't pay interest. For example, if you were to buy a 1 year today, you would purchase it for $94.84 and the Treasury would redeem it at maturity for $100. That's you receive the current yield of 5.43%.
- donavanm 3y ago
  The OP is confusing things a bit by conflating "yield to maturity" with "interest rate." Yield to maturity is the total return for the bond holder if they hold until it matures. That includes market/auction price, par (redemption) value, periodic coupon or fixed interest payments, and the time to mature. Expressed as a percentage thats "yield rate." That total yield rate will fluctuate on the secondary market based current prices or initial competitive auction prices. In short, for holding bonds you almost definitely care about total YTM and not the face coupon/interest rate.
  - londons_explore 3y ago
    It really feels like a system that could be simplified while all parties still get the financial effects they desire.
bandyaboot 3y ago
> It doesn't help that the US government has had to sell a lot of its bonds lately, i.e. the debt is going up quickly. That too is tied to things like inflation, as well as the war in Ukraine. Sure, in absolute terms the debt is going up quickly as it has for the past couple decades. But, in relative terms over that period, the current rate of increase is pretty average. Also, I’m honestly curious what you’re referring to with the specific inclusion of the Ukraine war. Its effect on the rate of increase in the US debt is virtually nothing.
- webninja 3y ago
  It’s $75 Billion not $75 million. The debt has grown so high now that 15% of all US government revenues go towards interest on the debt. Up from 7% when I was in college. How high does the debt have to grow before the country and government collapse? Better to advise the World Bank and the IMF to loan them money if that’s not happening already..
  - bandyaboot 3y ago
    $75 billion is about 2% of the debt increase since the war began and most of that hasn’t come in a form that would have affected the debt number yet. Some of it can’t properly be said to affect the debt at all such as giving them military equipment for which we had already allocated funds to replace. I won’t bother responding to anything beyond your first sentence since it doesn’t appear to be a response to anything I wrote.
  - astrange 3y ago
    > How high does the debt have to grow before the country and government collapse? The absolute amount doesn't necessarily matter, because if you own the bonds then you're paying the debt to yourself. Other factors are a) who owns them b) what the interest rate is c) what currency they're in. The usual problem for smaller countries is when they owe debt in foreign currencies. Also note that long term interest rates would be very high if the market thought there was a hyperinflation risk, and they aren't.
  - csomar 3y ago

gizmo 3y ago

Banks, pension funds, municipalities, retirees. A lot of folks are sitting on very significant losses. The bond market is much larger than the stock market, and that means that this is very significant. There are other indicators that trouble is afoot. Credit default swaps spiking for regional banks. Big discordance between stock performance and bond performance. Prolonged and significant yield curve inversion. Either bonds must go up or stocks must go down. Hard to predict which way this will resolve, but I don't see the Fed intervening unless the situation gets truly dire.

thoughtstheseus 3y ago
Defined benefit pensions do not mind higher rates. They use 6-8% discount rates for their known cash liabilities and can nearly fully immunize their portfolios with government bonds today. That’s maybe $1 trillion of capital converting into coupon bonds soonish.

olliej 3y ago

"It looks like you're using an ad blocker" And it looks like you're spying on me. These sites need to stop pretending that there isn't a cost to their users.

riku_iki 3y ago

guys decided to buy bonds with nearly 0 interest rate and now surprised they lose value when rate is 5% and inflation 10%..

rswail 3y ago
Except the current US inflation rate is ~3-4%.
- riku_iki 3y ago
  that's what their bonds are losing in addition to previous high inflation rates.

tracker1 3y ago

It's as if just printing trillions with a two trillion dollar deficit while also raising interest rates with record inflation doesn't inspire confidence or something.

Guvante 3y ago
Confidence? The article is explicit that everyone thinks future bonds will have higher interest rates. This isn't a "we don't think these will mature" this is "we think future bonds will have higher interest rates."