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If interest rates begin to rise, this can really be a serious problem. If people start liquidating their bond mutual funds and etf's and there is no liquidity

by nissimk 11y ago

If interest rates begin to rise, this can really be a serious problem. If people start liquidating their bond mutual funds and etf's and there is no liquidity in the underlying bonds, there will be a large dislocation. But isn't all this rhetoric and fear mongering just here to promote a continuation of the zero interest rate policy? Japan's been there for 20 years and we're only at year 8...we've got to maintain zirp forever now. The list of terrible things that will happen in a rising rates environment is quite long.

marko2525 11y ago
Yeah but the difference is that (non-index) mutual funds can actively allocate to different bonds so they have some protection against that. ETFs and index funds are in big trouble. For them, it's the equivalent of having people buy and sell an index of classic cars. If there is a big sell-off then you can't really expect to get a great price on selling all these classic cars when they might normally be bought or sold a few times a month. Being a forced seller is never good....
zhte415 11y ago
The risk of zero rates is greater. Low long term interest rates are bad, as they represent low (or zero) growth. A sell off in bonds, especially low-risk bonds such as treasuries, is a move into interest-seeking assets, which is an appetite for risk. This is a good thing. The economy is a balance sheet, however simplified or complexified it may be made. A low return on capital represents a low growth of capital. In some economies with less transparent capital markets, the link to official interest rates and actual growth is difficult at best, but in more developed capital markets the cost of capital is well proxied by the interest rate. And if the interest rate is low, the return on capital (at a macro level, totaling and summasing the micro level anecdote - micro level opinions go both ways) is low, and if that is low, then growth is low. Extra: Bond price falls indicate a move into risk. This is especially good for people affected by stock price falls coupled with low interest rates - 401kers for example, approaching retirement age with money in growth. Interest rates (higher) make buying annuities a lot more attractive.

by nissimk 11y ago

marko2525 11y ago

Yeah but the difference is that (non-index) mutual funds can actively allocate to different bonds so they have some protection against that. ETFs and index funds are in big trouble. For them, it's the equivalent of having people buy and sell an index of classic cars. If there is a big sell-off then you can't really expect to get a great price on selling all these classic cars when they might normally be bought or sold a few times a month. Being a forced seller is never good....

zhte415 11y ago

The risk of zero rates is greater. Low long term interest rates are bad, as they represent low (or zero) growth. A sell off in bonds, especially low-risk bonds such as treasuries, is a move into interest-seeking assets, which is an appetite for risk. This is a good thing. The economy is a balance sheet, however simplified or complexified it may be made. A low return on capital represents a low growth of capital. In some economies with less transparent capital markets, the link to official interest rates and actual growth is difficult at best, but in more developed capital markets the cost of capital is well proxied by the interest rate. And if the interest rate is low, the return on capital (at a macro level, totaling and summasing the micro level anecdote - micro level opinions go both ways) is low, and if that is low, then growth is low. Extra: Bond price falls indicate a move into risk. This is especially good for people affected by stock price falls coupled with low interest rates - 401kers for example, approaching retirement age with money in growth. Interest rates (higher) make buying annuities a lot more attractive.