4 ms·

Can someone explain this to me in lay men's terms?

deleted 13y ago
[deleted]
steven2012 13y ago
If the US govt defaults, it will default on the shortest end of the curve, because those are the payments that are required the soonest. This is why those rates have "spiked", even though 27 bps is miniscule.
- ballard 13y ago
  Would the severity of a default effect the value of currency very inelastically because any weakness signals a tip of an iceberg?
lmgftp 13y ago
BPS - Basis Point(S) (1/100th of a percentage point per Basis Point) This is the interest on the bond, and the Fed sells these Treasurys to the public in order to raise money on an interim basis. Effectively, it reflects the cost of borrowing money by the Federal Government of the United States to borrow money for ONE MONTH. This is a very short time period, as Treasurys are for sale in 1-mo to 30-year periods. So you'd only charge a high interest rate if you think the likelyhood of non-payment is actually an issue (that's risk vs. return). Typically, 1 month is very not-risky, as it's highly likely that the US Gov is still around and solvent in a month. But with the recent debt ceiling / government shutdown rhetoric the market is beginning to get a little worried, so the premium the government must pay in order to borrow money has increased. Basically by the Congress/White-House being deadlocked and having such fiery rhetoric it begins to appears as if there is a chance of default, and that chance is slightly higher than normal, so the risk/return on the 1 mo treasury has increased, as reflected in the increased interest rate the government has to pay to its bond holders.
- ibelimb 13y ago
  Does this mean it would be a good idea to invest in a one month bond if you can wait out the chance the government would be delayed in paying you back?
  - nerfhammer 13y ago
    the absolute interest rate is still very miniscule
    - pmarca 13y ago
      Yes but what hedge funds would do (are undoubtedly doing) is raise a huge amount of money on margin and use it to arbitrage the spread between these and related instruments with other durations. Of course this can go horribly wrong; read the book "When Genius Failed".
      - ballard 13y ago
        Oh god, LTCM. Beware of investors that have no demonstrable controls against automated/HFT pouring of more of my money into a black hole trying to "win" back their losses. The Trillion Dollar Bet is also a good, high-level documentary.
  - mdkess 13y ago
    http://en.wikipedia.org/wiki/Time_value_of_money http://en.wikipedia.org/wiki/Time_value_of_money Imagine we enter an agreement - you'll lend me $100 for a year, and I'll pay you $10 after a year. The banks will pay you $5 to borrow your $100, so you think this is a good deal. After a year, I pay you back the $100, but I don't have my $10 for interest. I'll pay you back as soon as I can, I swear, seeing myself to the exit. Five years later, true to my word, I give you the $10. So you get your money eventually - is this a good deal? Well, no, of course not. It may be better than the bank still, but it's not as good as the deal initially made it appear. You could have taken my $10, given it to a bank for the next five years and - assuming you didn't reinvest interest payments out of a noble desire to make math easier for yours truly - made $0.50 each year, for a total of $2.50. What's more, I could have done that, effectively reducing my debt to you by 25%. Of course, this isn't on that scale, but that is the risk of delayed payment.
JumpCrisscross 13y ago
On 1 October 2013 investors demanded 0.10% annualised interest for the U.S. Treasury to hold their cash for 1 month. Now they demand 0.27%. This is strange since they demand 0.05% for 3 months. Practically, banks, insurance funds, pension funds, and other risk-averse holders are dumping Treasuries due between 17 October and 1 November. Many of these institutions are highly leveraged and count on the certainty of cash from Treasury payments to fund other activity - a delay in payments from the Treasury, long considered "risk-free", could lead to them defaulting on other payments, leading to a daisy-chain collapse of credit similar to what we saw following the collapse of Lehman Brothers. By selling the riskiest securities, those due between 17 October and 1 November, these institutions can help defray the risk of being caught on the wrong end of an empty till.
marcamillion 13y ago
Investors, over the last 7 days, believe that there is more risk surrounding 1 mo Treasuries. A treasury is an investment that you get when you lend the government money. They promise to pay you back with X% interest in a certain time period. In this case, we are talking about 1 month. So, with the increase in interest rate from 0.10% to 0.27%, investors demand more return because they think it is now 170% more risky (Simply calculate the difference of 0.27 - 0.10), to lend the government money for a short-time period (1 mo), than it was just 7 days ago.
- digikata 13y ago
  Besides the absolute risks of default, an additional interpretation is that there is a risk that even if the shutdown/debt ceiling were worked out with no ultimate default - your principal and interest might end up tied up in some form of delayed hold on a one month scale, but that those issues are more likely to be resolved with no impact on a three month scale.
  - marcamillion 13y ago
    Good point, because money today is always better than money tomorrow....the whole time value of money concept[1]. [1] - http://en.wikipedia.org/wiki/Time_value_of_money http://en.wikipedia.org/wiki/Time_value_of_money

deleted 13y ago

[deleted]

steven2012 13y ago

If the US govt defaults, it will default on the shortest end of the curve, because those are the payments that are required the soonest. This is why those rates have "spiked", even though 27 bps is miniscule.

ballard 13y ago
Would the severity of a default effect the value of currency very inelastically because any weakness signals a tip of an iceberg?

lmgftp 13y ago

BPS - Basis Point(S) (1/100th of a percentage point per Basis Point) This is the interest on the bond, and the Fed sells these Treasurys to the public in order to raise money on an interim basis. Effectively, it reflects the cost of borrowing money by the Federal Government of the United States to borrow money for ONE MONTH. This is a very short time period, as Treasurys are for sale in 1-mo to 30-year periods. So you'd only charge a high interest rate if you think the likelyhood of non-payment is actually an issue (that's risk vs. return). Typically, 1 month is very not-risky, as it's highly likely that the US Gov is still around and solvent in a month. But with the recent debt ceiling / government shutdown rhetoric the market is beginning to get a little worried, so the premium the government must pay in order to borrow money has increased. Basically by the Congress/White-House being deadlocked and having such fiery rhetoric it begins to appears as if there is a chance of default, and that chance is slightly higher than normal, so the risk/return on the 1 mo treasury has increased, as reflected in the increased interest rate the government has to pay to its bond holders.

ibelimb 13y ago
Does this mean it would be a good idea to invest in a one month bond if you can wait out the chance the government would be delayed in paying you back?
- nerfhammer 13y ago
  the absolute interest rate is still very miniscule
  - pmarca 13y ago
    Yes but what hedge funds would do (are undoubtedly doing) is raise a huge amount of money on margin and use it to arbitrage the spread between these and related instruments with other durations. Of course this can go horribly wrong; read the book "When Genius Failed".
    - ballard 13y ago
      Oh god, LTCM. Beware of investors that have no demonstrable controls against automated/HFT pouring of more of my money into a black hole trying to "win" back their losses. The Trillion Dollar Bet is also a good, high-level documentary.
- mdkess 13y ago
  http://en.wikipedia.org/wiki/Time_value_of_money http://en.wikipedia.org/wiki/Time_value_of_money Imagine we enter an agreement - you'll lend me $100 for a year, and I'll pay you $10 after a year. The banks will pay you $5 to borrow your $100, so you think this is a good deal. After a year, I pay you back the $100, but I don't have my $10 for interest. I'll pay you back as soon as I can, I swear, seeing myself to the exit. Five years later, true to my word, I give you the $10. So you get your money eventually - is this a good deal? Well, no, of course not. It may be better than the bank still, but it's not as good as the deal initially made it appear. You could have taken my $10, given it to a bank for the next five years and - assuming you didn't reinvest interest payments out of a noble desire to make math easier for yours truly - made $0.50 each year, for a total of $2.50. What's more, I could have done that, effectively reducing my debt to you by 25%. Of course, this isn't on that scale, but that is the risk of delayed payment.

JumpCrisscross 13y ago

On 1 October 2013 investors demanded 0.10% annualised interest for the U.S. Treasury to hold their cash for 1 month. Now they demand 0.27%. This is strange since they demand 0.05% for 3 months. Practically, banks, insurance funds, pension funds, and other risk-averse holders are dumping Treasuries due between 17 October and 1 November. Many of these institutions are highly leveraged and count on the certainty of cash from Treasury payments to fund other activity - a delay in payments from the Treasury, long considered "risk-free", could lead to them defaulting on other payments, leading to a daisy-chain collapse of credit similar to what we saw following the collapse of Lehman Brothers. By selling the riskiest securities, those due between 17 October and 1 November, these institutions can help defray the risk of being caught on the wrong end of an empty till.

marcamillion 13y ago

Investors, over the last 7 days, believe that there is more risk surrounding 1 mo Treasuries. A treasury is an investment that you get when you lend the government money. They promise to pay you back with X% interest in a certain time period. In this case, we are talking about 1 month. So, with the increase in interest rate from 0.10% to 0.27%, investors demand more return because they think it is now 170% more risky (Simply calculate the difference of 0.27 - 0.10), to lend the government money for a short-time period (1 mo), than it was just 7 days ago.

digikata 13y ago
Besides the absolute risks of default, an additional interpretation is that there is a risk that even if the shutdown/debt ceiling were worked out with no ultimate default - your principal and interest might end up tied up in some form of delayed hold on a one month scale, but that those issues are more likely to be resolved with no impact on a three month scale.
- marcamillion 13y ago
  Good point, because money today is always better than money tomorrow....the whole time value of money concept[1]. [1] - http://en.wikipedia.org/wiki/Time_value_of_money http://en.wikipedia.org/wiki/Time_value_of_money