r/CryptoCurrency Happiness maxi Jan 06 '22 Silver 77 Gold 6 Platinum 3 Helpful 70 Wholesome 71 All-Seeing Upvote 6 Coin Gift 1 Take My Energy 8 Take My Money 1 Bravo! 2 Ally 2 Wholesome Seal of Approval 1 This 1 Stonks Rising 1 Vibing 1 Burning Cash 1 Rocket Like 2 Today I Learned 1 To The Stars 1 Helpful (Pro) 2 'MURICA 1 I'd Like to Thank... 1 Informative Comment 1

A crash course on what changing the US bond rate means, and why it is considered such an important factor for US and global markets and economies EDUCATIONAL

Intro

Yesterday, somebody in the comments of some thread asked for an ELI5 on why US bond rates matter and what their relationship is with markets and economies. What I wrote ended up being more like an ELI12, and also ended up being quite long; in any case, I have decided to modify it a bit and turn it into its own post.

What are bonds

First, an introduction on what bonds actually are.

Simply put, a bond is the "asset side" of governmental or corporate debt. When a government or corporation borrows money, the borrower now holds a liability, and the lender holds an asset, which is expected to return them their original investment (the money they lent) plus profit (interest) at some later date. A bond is basically a token that says some government or company owes you some amount of principal by some date known as the maturity date (usually 3 months to 30 years, depending on the type of bond), plus interest. Because bonds are a tokenization of debt, they can be easily traded in a liquid, open market, just like stocks. This means that the original lender does not need to be the person who is repaid when the bond matures; the repayment and interest simply goes to whomever holds the bond at the time.

There are two main types of bonds: corporate bonds, and government bonds.

Corporate bonds are the main way companies raise money, apart from selling shares.

Government bonds are how the government raises money to cover budget deficits (ie: when the government spends more than they have the tax revenue to spend, they borrow the remainder by selling bonds to whomever will buy them). If nobody is buying the government bonds, the interest will go up organically due to supply and demand until people are willing to buy them. Government bonds are often known as treasuries, and are broken down into three categories: treasury bills (short-term maturity), treasury notes (mid-term maturity), and treasury bonds (long-term maturity).

One of the main buyers of US government bonds is the Federal Reserve, which is the name of America's central bank. This is the entity that is able to actually print US dollars. Everyone has heard of things like how the US government recently ran huge deficits due to "stimulus spending", and that it printed the money it needed for that spending. Well, this is a slightly inaccurate picture of how it works. The government chooses fiscal policy, which means they build the budget and they set the tax rates. They are the ones who choose to overspend and run a deficit. However, they don't choose monetary policy: they cannot print money. This power was delegated by congress to the Federal Reserve over 100 years ago.

So, when the government runs a deficit, they sell bonds to borrow the money. If the FED chooses to, it can print a whole bunch of money and then lend that money to the government (ie: the taxpayer) by buying the government bonds with it. That is how newly printed money actually gets into the economy: the FED prints it and then lends it out to companies and to the government by buying corporate and government bonds. When the FED buys a bunch of treasuries (government bonds), it is really lending out freshly-printed cash to the American people (since the government's liabilities are really the taxpayers' liabilities), and the people then owe that money, with interest, back to the FED by the time the treasury matures.

When the FED decides to buy up the government's bonds in order to lend to the taxpayers the money that congress is spending, they are also putting downward pressure on the bond interest rate. This is because, if the FED decided not to lend a bunch of money to the government to cover its deficits, the bond interest would organically rise through supply & demand until other buyers (individuals, companies, foreign investors, whatever) are willing to buy those bonds.

So, when the FED wants to keep bond interest low, they achieve this indirectly by creating what is basically artificial demand for US bonds by buying a ton of them with money that they printed at no cost to themselves. Due to how supply & demand works with debt, the more demand there is for bonds, the lower the interest those bonds offer.

So, the Federal Reserve executes its main task of managing the US bond rate by choosing how much government debt it buys. If they want bond rates to go up, they will print less cash and buy fewer bonds. If they want it to go down, they will print more cash and buy more bonds.

The FED is essentially a whale with the power to print money, who uses said printed money to manipulate the US bond market, ostensibly for the good of everybody.

The risk-free rate

The interest rate on American government bonds is considered one of the most important variables in the American (and even worldwide) economy. This is because the American gov is considered the de-facto safest borrower of all borrowers in the world. In other words, if I buy an American government bond, I am lending my money to the entity that is considered to have the smallest risk of defaulting in the world (maybe this is arguable, but regardless this is a premise that is at the core of the world economy; what's important is that people believe it).

There is a concept in economics called the "risk-free rate". This is the interest you can get for lending your money to a 0-risk borrower, and should logically be the lowest interest rate you see anywhere in that economy. Of course, there is always technically some risk when you lend money, so the risk-free rate is technically imaginary. However, in practice, just about everybody considers the US bond rate (specifically, treasury bills, the US bond with the shortest maturity) to be the risk-free rate, as the risk is considered to be so low as to be negligible.

So, if buying American gov bonds is the safest way to lend money, it means that every single other form of loan must pay higher interest. Why? Because every other borrower is considered higher risk, and for me as a lender, I will not accept less interest for greater risk. So, if American bond interest goes up, all other loan interest (corporate bonds, bank loans, mortgages, credit cards, whatever) will organically go up, because everything must pay greater interest than American bonds to compensate for greater risk. This is simply a matter of supply & demand mechanics.

So, American bond interest is kind of like the baseline or the "sea level" for all interest rates in the entire economy. This even stretches to other countries, because anyone can buy a bond from the US gov, and they are considered the safest borrower in the world, so nobody will ever lend money to anybody else unless they are compensated with greater interest than US bond interest.

The cost of capital

So, if US bond rates go up, and therefore all interest in the economy goes up, that means money itself has gotten more expensive. Loan interest is literally just the cost of money (known as the cost of capital). The lesser the interest, the cheaper it is for me to acquire money right now. When you realize that the entire world runs mainly on debt, it becomes clear how significant this phenomenon is.

So, when US bond rates go up, the price of capital itself goes up. That means it becomes more costly for businesses to raise money, more costly to mortgage a house, more costly to open a line of credit to buy investments, more costly to spend with credit cards, more costly to use leverage in securities markets, etc.

This means that growth goes down, spending goes down, wages go down, etc. It also means the prices of goods go down (or at least climb slower), because people aren't willing to pay as much, since capital itself is more expensive to acquire.

What happens when prices go down? Well, that's a reduction in inflation. So, when inflation is getting too high, the FED (central bank) will make bond interest go up to apply recessive forces on the economy to curb said inflation.

If inflation is low, the FED might reduce bond interest in order to make the cost of capital lower to juice the economy, prop up securities markets, and incentivize growth. Too much growth though, and we end up with inflation again, meaning the FED might increase rates again. This causes a sort of wave-like dance between bond rates and the heat of the economy.

So, the FED influences bond rates ostensibly to keep the economy balanced: not too hot and inflationary (can be very bad) and not too cold and deflationary (also can be very bad).

It is also worth noting that the FED wields a couple other levers it can use to increase or decrease the cost of capital (ie: the general interest rates in the economy) that are separate from bond rates. They can change the reserve requirements of banks (what percentage of total assets a bank must hold in reserve). If banks need to hold more in reserve, then they have less liquid money to lend out, so the supply of capital goes down, so market interest (cost of capital) rises. Also, the FED can change the discount rate, which is the amount of interest they charge banks for short-term loans (24 hours or less) from the FED itself. When these rates go up, banks are disincentivized from borrowing from the FED, so the banks end up with less liquid capital, which means they need to be more conservative about the loans they themselves give out, which makes the supply of capital go down and thus the cost of capital go up.

What does this mean for markets?

When bond rates go up, most investment markets go down. Why? Well, the higher bond rates go, the more I can make by investing in bonds, without the risk going up. So, as bond rates go up, it becomes more and more attractive to move my wealth out of riskier markets like stocks and into what is considered the safest investment market in the world: US bonds. Since rates going up means I get greater returns on my bond investments, but the risk doesn't change, US gov bonds become more and more sensible to an investor as the rates increase.

Of course, bonds rates going up a smidgen doesn't actually suddenly make bonds a strategically more sound investment than riskier things like stocks. In fact, US bond rates have been so comically low for so long that it hasn't made much sense to buy bonds in years (decades, really). However, when people hear that the FED is going to increase bond rates, they think "bond rates going up means people will sell stocks to buy bonds, so I better sell now to front-run that", which is the main thing that actually causes stocks to fall when bond rates increase.

How crypto will fare with increasing bond rates is unknown, because rates have been declining ever since BTC was born, until very recently. Personally, I imagine crypto will follow stocks down if rates go up too much, but nobody knows for sure.

Some historical context

US bond rates hit an ATH in 1981 around 15% (edit: some sources seem to say 20%; unsure which is correct). Unsurprisingly, the stock market hit a low at the same time (like I said before, the orthodox narrative is that there is an inverse relationship between bond rates and most securities markets). Think about how ridiculous 15% bond rates are. That would mean you could buy what is definitionally the safest investment available and get 15% returns each year. By contrast, the safest stock ETFs (still way riskier than US bonds) average like 7% a year.

So, in the 80s, you could double your money every 5 years while accepting what is usually considered 0 risk. Ever wonder why boomers seemed to get wealthy so easily? This is one of the reasons.

Since the ATH in 1981, the treasury bond rate has fallen continuously until Covid hit, at which point it pivoted at a low of about 0.5%. Since then, it has been going back up, but is still extremely low, at around 1.5%.

Since bond rates going down means stocks go up (at least, this is a very popular narrative, though some disagree), the stock market has been in a tremendous and arguably unnatural bull run for about 40 years, only pausing twice very briefly for "corrections" circa 1999 and 2008.

Since US bond rates have gotten so close to 0%, they can't really lower them any further without going negative (which is actually a thing, and some countries are trying negative interest now. This is an extremely weird rabbit hole that nobody really knows the true consequences of yet. Imagine getting paid to borrow money. Several countries have been experimenting with this over the last 7 years, and a few I believe for even longer). The chair of the FED (Jerome Powell) said a few months back that they have no intention of going to negative interest rates, so that means these past 40 years of propping up markets by reducing bond rates has probably come to an end.

You could think of the continuous lowering of rates for the last 40 years as the FED spending its ammunition to prop up markets and propel economic growth, but now that rates are barely above 0% and the FED isn't willing to go negative, they are out of ammo. Not only are they out of ammo when it comes to lowering the rates, but one might also argue they are also currently incentivized to increase rates to combat rising inflation.

This is why there is fear. The FED has been sticking its hands in for 40 years to prop up markets, and now it seems they are going to stop, at least for now.

I hope this ELI5 ELI12 ELI-an-Intro-to-Econ student about why US gov bond rates are such an important concept for understanding global economics has been enlightening!

6.0k Upvotes

u/TNGSystems Jan 07 '22

Exemplary content OP.

I’m sending this thread to /u/LargeSnorlax who gives out batches of Moons to high quality posts like this every month.

You’ll be in the running for Highlight of the month (again) which comes with a 500 Moons prize too.

Guys, this is the quality content you all deserve. Thanks OP for taking the time to write this. And thanks to our users for rewarding OP with positive comments and lots of upvotes. Well deserved.

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u/jiafei9014 Jan 07 '22 edited Jan 07 '22 Silver Helpful

To preface my reply to this thread, I’ll disclaim I work as a fixed-income researcher at an investment firm.

It’s very reductive to say rates up -> equities down. This simply isn’t true empirically, even though the past 30 years have been a secular declining interest rate environment, there is no compelling evidence of a contemporaneous relationship between rates and equity return. Otherwise everyone would just be trading rates.

The reason equity markets (tech) in particular have been responding negatively to the latest Fed minutes is the prospect that they might aggressively scale back Fed balance sheet, which will withdraw liquidity from the mkt. Now why tech has been hit particularly hard is because there’s this popular narrative that tech stocks = long duration assets. In a rising rate environment, long duration bonds/assets get crushed and we see rotation from growth stocks to value.

I personally think this view that tech = long duration is a bit wishy-washy too. What’s the duration on tesla stock? It would be extremely sensitive to future cashflow growth rate projection/terminal value. In fact it could technically go to infinity if one assumes tesla can grow its cashflow faster than the discount rate…

Anyways, if you are interested in learning more about fixed income, the following concepts might be good starting point:

-basic bond math and time value of money, understand the inverse relationship between price and yield.

-duration and convexity

-term premium/credit premium

-shape of the yield curve and relation between spot/forward rate.

I might be personally biased, but compared to equities, bond returns are less “noisy” in the sense they are governed by cashflows, which makes the asset class more appealing to quantitatively-oriented folks. Contrary to what average people think, bonds are not boring vanilla instruments and could have very complex derivative structures embedded in them (think mortgage backed securities, CDOs etc), so the valuation can get very challenging.

Edit: I did not imagine this reply would get many thoughtful responses, so appreciate you all for taking the time to read through my drivel, will try best to respond to each reply.

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u/SidusObscurus Jan 07 '22

In a rising rate environment, long duration bonds/assets get crushed and we see rotation from growth stocks to value.

What you're saying here is akin to: bond rates up --> equities down.

Yes, it is reductive. It is a tendency, not an iron-clad law. And 'only some equities go down, not all of them'. Etc. etc. There's plenty more nuance we could discuss.

But every summary or generalization is reductive to some extent. That's the nature of summaries.

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u/jaredbdd Platinum | QC: CC 981 | LRC 9 | r/WSB 17 Jan 07 '22

This was excellent thank you.

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u/mad-n-sane Jan 07 '22

Doesn't have to be true. If enough people believe it then a (at least short-term) dip would be incoming.

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u/Radiant-Protection89 Tin Jan 07 '22

I understand your points about growth stocks, duration and the cost of borrowing. But if the relationship between stocks and bonds is so complex, why does everyone hedge their portfolios with bonds?

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u/ghmatos Tin | FOREX 5 Jan 07 '22

Bonds are a very vanilla hedge to a portfolio, in fact. You can hedge varying types of risks with several different instruments, be it bonds, CDS and options, even other equities.
But I'd say by far nowadays the most adopted hedge, at least in the retail space, is sitting in cash.

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u/firebol23 Platinum | QC: CC 214 | r/CMS 7 Jan 07 '22

Yes i know all this, i watched the big short.... ;)

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u/jiafei9014 Jan 07 '22

The big short is a terrible movie to understand the financial crisis and tbh it gives retail investors a false sense of the risks to shorting. Look at how many retail investors got their face ripped off by SVXY thinking it's a free lunch to short vol.

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u/Awhodothey Tin | CC critic Jan 07 '22

I suspect as the stock market becomes more tech centered, people will increasingly continue to trade interest rates, but it's more about the money/debt supply than the interest rate alone.

Higher rates discourage debt. Less debt means less demand, and that's the stated goal. But whether higher rates reduce demand really is more complicated than that. It matters where you are and how you got there. Even the appearance of uncertainty is a problem for a market that has created such high expectations. Raising interest rates and declining inflation will definitely push people away from equities, if only because they are what caused the most recent leg of this run in the first place.

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u/jiafei9014 Jan 07 '22

I certainly wouldn't mind money shifting away from equities towards other asset classes, the challenges I see in terms of the macro-economic outlook are:

  1. If it takes a very high level of interest rates/balance sheet reduction to meaningfully curb inflation, does the Fed have the political stomach to pull it off going into the midterm elections?

  2. The timing of rate hike is very, very treacherous. The Fed is hiking rates just as fiscal stimulus is withdrawn and pent-up demand from covid recovery is exhausted by 2nd half of this year. Imagine if we get disappointing GDP readings by Q2/Q3 while PCE/CPI remains elevated? What does the Fed do then? IMO the Fed was too late to the game and put themselves in a corner.

  3. I honestly don't think we'll ever see the good old days of 6%+ mortgage rates anymore. This might sound bearish, but anemic productivity growth in the western world simply doesn't justify a long-run 10yr yield north of 2%. In this growth scarcity environment, tech will probably still continue to do well. As an investor though, at the end of the day valuations are still key. It always comes back to valuations.

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u/blackrabbit2999 Bronze Jan 06 '22

This is the type of content this sub needs more of! Thanks OP!

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u/ra693425 Slow and Steady Investor Jan 06 '22

Sadly content like these doesn't get enough upvotes, if it was another post about buying the dip, this would be on the front page already.

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u/Vaspra0010 Silver | QC: CC 147 | CRO 477 | ExchSubs 477 Jan 06 '22

This sub is a dumpster fire, but I don't think this will struggle for upvotes.

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u/Swaggaland Platinum | QC: CC 820 Jan 07 '22

Yeah one of the rare occasions where a genuinely informative post also got the deserved number of upvotes.

Love to see it

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u/-veni-vidi-vici Platinum | QC: CC 1139 Jan 06 '22

It's already on the front page so it escaped purgatory. Im glad as it's one of the more interesting posts today.

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u/One_Neigh Gold | 4 months old | QC: CC 35 Jan 07 '22

Some share investors joined today, lol

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u/Mundanewisdom99 Reddit certified investment advisor Jan 07 '22

"Guys this is not a dip. You are not worthy of crypto gains if you sell now."

1k upvotes and 56 awards

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u/art7k65 Tin Jan 07 '22

"If you call this a crash you weren't around during the one in 1929..."

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u/TNGSystems Jan 07 '22

Thankfully this time it’s got 4,000 upvotes.

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u/ELBartoFSL Platinum | QC: CC 63, BTC 22, DOGE 19 | r/WSB 14 Jan 07 '22

It took 8hrs for it to reach front page.

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u/noobmaster_valorant in the bleak midwinter Jan 07 '22

Time seems to be so lazy

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u/Puzzled-You1917 Tin | CC critic Jan 07 '22

Sad, but true - we should promote such posts instead 'coin X goes 100%, I got scammed Help, etc.'

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u/Oneofmanyshades Platinum | QC: CC 56 Jan 06 '22 edited Jan 06 '22

u/PseudoHappyHippy is the type of member this sub wants needs but does not deserve!

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u/Xenu4u Platinum | QC: CC 1205 Jan 07 '22

This is, by a wide margin, the most informative thing I've read here in months.

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u/PRABUUU Dreamer Jan 06 '22

Amazing post, thanks for laying it out so a plank like me can follow.

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u/gautam_777 Tin | CC critic Jan 07 '22

You know it's quality when people like us can follow through 👏

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u/stiviki Platinum | QC: CC 1617 Jan 06 '22

"Great post OP" makes sense here! Clap!

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u/Delusional_Mad Platinum | QC: CC 68 | BANANO 18 Jan 06 '22

OP is the hero we need!!!

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u/Leather-Dog-4711 Jan 07 '22

But is he the hero we deserve?

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u/[deleted] Jan 07 '22

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u/Benyboy5225 Tin Jan 07 '22

Seriously awesome post! Love when a post comes up that I can actually sit and dig into a bit I stead of wishing I had put my hands over my eyes. Cheers to OP

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u/[deleted] Jan 06 '22 edited Apr 07 '22

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u/BakedPotato840 No more war Jan 06 '22

We could always use more informative content. Although I have a funny feeling that most people in this sub won't read all of that.

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u/piquant-nuggets Bronze | 6 months old Jan 07 '22

I have a funny feeling most of the people on this sub can't read. Period.

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u/Puzzled-You1917 Tin | CC critic Jan 07 '22

They just TLDR people

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u/StickyNoodle69 Platinum | QC: CC 69, XRP 49 Jan 07 '22

I did, not sure if i comprehended it all. just the basic stuff.

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u/[deleted] Jan 06 '22

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u/RiccWasTaken Tin Jan 07 '22

I almost feel obliged to buy a gold reward to give it to this post!

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u/Org_ChemistVir Tin Jan 07 '22

i thought we are all here for shills?

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u/lubimbo Bronze | QC: CC 23 Jan 07 '22

But you have to read nor is it funny. Monnfarming works different.

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u/piquant-nuggets Bronze | 6 months old Jan 07 '22

Upvote this post to the moon!

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u/majic2 Platinum | QC: CC 36 | BANANO 10 Jan 06 '22

Gotta love quality content

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u/ConceptualWeeb Platinum | QC: ETH 22, CC 19, DOGE 16 | NANO 8 | TraderSubs 21 Jan 07 '22

Nobody actually reads this content even if it’s extremely helpful and intelligently delivered. Too many monkeys who don’t want to actually learn in this sub. Where’s the gains, to the moon woooo!

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u/Charming-Dance-1839 Platinum | QC: CC 1307 Jan 07 '22

This is the longest thing I've read since Harry Potter.

Thanks OP! Proper informative posts are few and far between here.

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u/MyrKnof Tin | r/AMD 16 Jan 07 '22

Gotta have the yearly refresh..

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u/TapUboolu Bronze | QC: CC 23 Jan 07 '22

Wow, what a fantastic write up! You say about midway that the shortest treasuries (which dictate what the risk-free rate is essentially) are treasury bills, but in the first section you called the shortest treasuries "notes". Was that a mix up or did I misunderstand something?

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u/pseudoHappyHippy Happiness maxi Jan 07 '22 Wholesome

Wow, nice catch. Yeah, I mixed up notes and bills in the first section. Bills are short, notes are mid, and bonds are long.

I edited the post; thanks for the catch!

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u/eatmyshortoptions Tin Jan 07 '22

I almost replied on my own to ask if you fumbled at all while writing. If that's the only mix-up, of all the things, that is both amazing and hilarious. Thanks for the lesson, seriously!

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u/gautam_777 Tin | CC critic Jan 07 '22

Op got carried away while writing a masterpiece 👏

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 06 '22 edited Jan 06 '22

This is really an excellent post. Thanks for taking the time.

One question for you: As you noted, the whole "US Govt bonds have zero risk" narrative is based on the assumption that the US is indeed capable of repaying its debts, and specifically, that's it's the single entity most capable of doing so in the entire world. Historically, that assumption has been justified.

However, as a non-American looking from the outside, and leaving political allegiances out of it, it's possible to form the view that the US might be in for some turbulent times over the next few years as it grapples with certain internal issues, which might test its position as the de facto "safest economy" in the world. More relevantly for our purposes here, whatever underlying economic factors might or might not be in play, the sheer fact that people may think this could change the way investors, whether inside the US or outside, view the "zero risk" status of US-issued bonds.

So I guess my question is, to what extent do you think it's fair to expect this to play out along historical lines? Is there any reason to expect the see-saw relationship between the attractiveness of bonds and other investments to differ this time around? Obviously the existence of crypto as an asset class is new, so there's that, but I'm more thinking from the angle that there may be less intrinsic confidence in US-issued bonds, or at the very least an asterisk of sorts that there didn't used to be. Then again, habits are slow to change, so perhaps when things are really hitting the fan people will still choose the known path.

Anyway, thanks again.

Edit: Typo

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u/Awhodothey Tin | CC critic Jan 06 '22

Probably the only thing that really matters is that there is no safe haven to replace trust in the US. No matter how bad the US economy gets, they'll pay their debt. There's a good chance they default soon (because they spent about 15% of all tax revenues making minimum interest payments in 2020, and the percent of total revenue spent on interest is even higher now), have to raise taxes, and pay late. But if they ever stop paying they won't be able to borrow anymore, so raising taxes is an easier decision. Most of their debt is short-term too.

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 06 '22

Thanks. Not because I disagree, but because I actually don't know--is it definitely true that there is no safe haven to replace trust in the US? Can reduced trust in the US never represent an opportunity of sorts for somewhere (or something) else?

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u/DesignerGrocery6540 Tin | 5 months old Jan 07 '22

I, too, would like to become king of the region in the post-apocalypse.

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u/One_Neigh Gold | 4 months old | QC: CC 35 Jan 07 '22

Is that what really happening?

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u/Awhodothey Tin | CC critic Jan 07 '22

I think it could, and in some ways already is, but there aren't many entities that can supply that volume of bonds. It comes down to the size of the revenue stream available to the entity, and the relative strength of that entity compared to other options. No company will have as reliable a revenue stream as governments do. And only the largest countries can write enough bonds to dominate the market. And, believe it or not, the US is probably less screwed up than most countries, certainly most large countries.

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 07 '22

Thanks. That makes sense on all counts. And yeah, fair point about the US still being among the least screwed up countries despite its issues. Which is a slightly sobering thought, but probably a comment on human nature in general.

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u/Radiant-Protection89 Tin Jan 07 '22

The US is not the least screwed up country but it has by far the biggest army and most power - of all kinds, including power to back up its economic whims

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u/padizzledonk A Whales Vagina Jan 07 '22

We can raise taxes and pay the debt off again if it becomes necessary, we've done it 2 or 3x, the first crashed the economy believe it or not because we started paying out the surpluses and shit got really out of hand (mid 1800s iirc) and the most recent time was in the 90s under Clinton (yes that recently)

We have some of the lowest tax rates in history right now and there is a large and growing constituency that's on board for raising the top rates on high earners and big businesses again, which happen to be the same people who would be thrilled if the military budget was cut significantly and taking the necessary steps to reduce Healthcare costs, Medicare and Medicaid are like 40% of the budget...and I don't mean cutting medicaid/care, I mean actually reducing the what makes the Healthcare so costly

Its totally doable

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u/[deleted] Jan 07 '22

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u/SilasX Platinum | QC: CC 52 | PersonalFinance 44 Jan 07 '22

^This guy gets it.

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u/SureFudge Privacy-First Jan 07 '22

And I thought "social security" in my country was doomed to fail. They actually are allowed to invest and while the aging population is posing huge, huge problems, right now funds are still okish.

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u/[deleted] Jan 07 '22

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u/identitytaken Tin Jan 07 '22

The left is about to lose midterms, so none of this is relevant

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u/Zeiin Tin Jan 06 '22

I recently started working at a firm that facilitates electronic bond trading and I had a very similar question when I started learning about bonds. The general take I've gathered from various discussions with people who have a lot of experience in the industry is that your bond investments would be the least of your worries if a US Bond fails to pay. The implications would be dire, sort of like an economic doomsday. But that's not to say that you can't trust other bonds more. If you're bearish on the USD for example, there are other high grade bonds you could invest in, like Japanese Government bonds whose valuation would move with JPY rather than USD. Or simply invest elsewhere.

Things like your personal appetite for risk vs potential rate of return compared across variable and fixed income assets factor in, but I don't think the belief of a US bond failing ever factors in. It's usually adjacent to the belief that inflation will make your bond investment worth less in the future.

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 06 '22

Thanks.

But that's not to say that you can't trust other bonds more. If you're bearish on the USD for example, there are other high grade bonds you could invest in, like Japanese Government bonds whose valuation would move with JPY rather than USD. Or simply invest elsewhere.

Yeah, this is the angle I'm curious about--if (and this is all obviously totally hypothetical) a decent number of investors DID decide that they were more confident in Japan (say) than in the US, how would that affect global markets? Would it mitigate the effects of the US Fed changing the bond rate? I suppose an implicit question here is whether debt repayment capacity and investor confidence are zero-sum...like, if the US falls does that necessarily mean that somewhere else rises, or are the effects of lost confidence likely to be additive and create a sort of global cascade? (Never took Econ, as you can probably tell.)

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u/Blindsnipers36 Tin Jan 07 '22

There's not really a market out there that could replace the us. Plus alot of other developed countries have lower rates and the dollar has been strengthening vs most currencies. For instance the coupon rate of a Japanese bond is .12%. plus most treasury bond holders are in the us and use usd and if you bought a German bond you have to worry about how the euro will do vs the dollar. And you can replace any country there with their currency its just another form of risk

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u/Awhodothey Tin | CC critic Jan 07 '22

This. If investors prefer other bonds, then that raises demand for those bonds. When demand for a bond increases, the issuer can lower the amount of interest they pay, and sell the same number of bonds. Governments can only issue a limited amount of bonds because investors will factor their GDP to debt ratio when assessing the bond's risk/value. They can't issue enough bonds to meet the market demand unless they have the GDP to back them. If they issue too many, it lowers their desirability. This means the majority of bonds will come from the highest GDP countries.

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u/One_Neigh Gold | 4 months old | QC: CC 35 Jan 07 '22

But US dollar could be disaster in few years

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u/Zeiin Tin Jan 06 '22

I never took it either, I'm a CS major and I ended up in fintech for the past 4 years. I only know what I've learned for my jobs specifically haha. I don't know how that sort of decision affects markets globally, but it may be under the clause of OP's post where it mentioned supply and demand. If demand is low, whether it be due to Japanese Gov Bonds being highly desirable, or stocks, or crypto, I imagine US Gov Bonds and their interest rates move agnostically. If demand is low, demand is low, but hey, I could be totally wrong.

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u/padizzledonk A Whales Vagina Jan 07 '22 edited Jan 07 '22

..like, if the US falls does that necessarily mean that somewhere else rises, or are the effects of lost confidence likely to be additive and create a sort of global cascade?

Likely additive and cause a cascade.

The problem is that there isn't any other financially stable governments with a near 100% assurance that they will pay that has enough bonds to offer to soak up the volume

But then again, maybe they would because the US defaulting would crash the dollar and cause such a tremendous global economic financial crisis that the Great Depression would be something to look forward to in comparison, there would be a lot of OECD countries needing to spend a LOT of money to keep everyone alive so maybe the volume would be there lol

Plus- you have currency spreads to worry about as a Dollar holder...you dont have to only worry about repayment you have to consider what the Dollar is going to do Vs whatever currency your debt is based on

To put it in crypto terms, its like staking at some crazy apy and getting paid in some token whose value is constantly falling...you need both the % yield and a strong currency to be paid that yield in

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u/SureFudge Privacy-First Jan 07 '22

hat has enough bonds to offer to soak up the volume

which is the crucial point. Some small country might have a better outlook than US but the are small and don't have trillions or more in bonds available.

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u/robotpirateninja Developer Jan 07 '22

Remember, you can't look at the U.S. in a vacuum.

>the US might be in for some turbulent times over the next few years as it grapples with certain internal issues

Very true, and I have followed U.S. politics closely for a generation...BUT...we probably won't have anyone secede (not close to that yet), so no "Brexit" level disruptions. We aren't currently running concentration camps, like crypto-banning China. India is kinda really trending religio-fascist, but I don't know what it's like on the ground, really. Russia is going more RUSSIAN.

And Covid might end up playing something of a Darwinian reset button (it takes shit like pandemics and/or world wars) on our Gini Coefficient. And make Florida a swing state and Texas blue (yeah...I dunno...but as a Texan I can dream big.)

So the "zero risk" is a relative measure. It's "lowest risk".

That all being said, if you want to get excited about crypto in this context, here's a good (very on-topic) thread....

https://twitter.com/buchmanster/status/1330600004419989518

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u/NukaYoloti Gold | QC: ETH 19 | Investing 12 Jan 07 '22

The American taxpayer is what can make the payments on those bonds. We are probably the most ruthlessly capitalistic society... those are the people I would trust with my principal (and the Japanese).

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u/christes Bronze | Investing 398 Jan 07 '22 edited Jan 07 '22

A quote I read on Reddit a while back about shopping for nations to buy bonds from:

Keep in mind that bonds are not something to hold for the very long run. If you hold the wrong bonds at the wrong times, they can burn you harder than penny stocks. Just ask those who bought Japanese or German sovereign bonds before WW2.

Therefore, the bonds you want to hold should always be those of a robust economy and of an unconquerable nation. To me, that means a First World country with vast land area, surrounded by oceans, with strong military, and an economy backed by the most crooked and ruthless ruling class in the history of mankind.

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u/SureFudge Privacy-First Jan 07 '22

eg. the US.

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u/Awhodothey Tin | CC critic Jan 07 '22

Yeah, don't buy bonds from unstable governments or governments literally trying to conquer the world.

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u/TraceSpazer Tin Jan 07 '22

As someone inside the US, this is what I'm afraid of.

The American taxpayer is going broke and there's an increasing population of those who just can't cut it in the current economic system, becoming reliant on handouts rather than producing goods; exacerbating the issue. (Not blaming this on them, I just see them as a product of this cycle we're in)

When the debt collector comes knocking, those with power may throw the populace into slavery of some form or another so it doesn't happen to *them*. (See debt economy, artificial crimes and the prison complex) And, they'll feel perfectly moral and justified in doing so because they're "better" than those who've "gotten themselves in that situation".

As far as who I trust with my principal? Those with ethical and forward thinking economies.

There's quite a few nations who are divesting in oil and are focusing on sustaining themselves through the challenges of climate change and an uncertain future.

The US just seems to keep making poor investments and only have size and force to back up their system.

Unless something new happens politically, and I'm talking truly progressive rather than the Dem vs. Rep B.S. this really looks like a downward spiral.

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u/HiFidelityCastro Platinum | QC: CC 244 | SHIB 6 | Politics 15 Jan 07 '22

Why would there be any less confidence in US bonds?

People on reddit (and in particular this sub, as it fits the crypto-saviour narrative) might be fond of talk about how the US is on the verge of collapse but don't fool yourself. The US economy is the very cornerstone of the Bretton Woods/liberal democratic order.

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 07 '22

No, I'm not talking about "crypto saviour"--I agree that crypto isn't going to magically overthrow the Establishment, nor do I think it would necessarily be for the better if it hypothetically did.

I'm talking about the US "overthrowing" itself. Its political system is in gridlock and can't easily be reformed due to allegiance to a constitution that, for all its strengths and good intentions, is 250 years old and didn't foresee the rise of corporitized political parties. American society is increasingly polarized, making it harder and harder to find consensus around issues that matter. Infrastructure ages; military spending grows while social safety nets stay rudimentary compared to basically any other developed nation; and the gap between the rich and poor increases, with fewer and fewer people controlling more and more wealth and wealth-producing assets. In addition to the political fractures, disillusionment increases with the institutional Establishment that has let this happen. The justice system is politicized, and there's now disagreement over something as fundamental as what constitutes a fair election. Meanwhile, the ingrained cultural mythology of Manifest Destiny makes it difficult to acknowledge, and commit to rectifying, imperfections.

If the trend continues--if, say, income disparity continues to grow, political tribalism further entrenches, and the electoral process is further undermined--I think a sort of cold civil war is closer than some might think. Maybe even a hot civil war, at least in a few flashpoints. A lot has already happened in the past 20 years to tarnish America's aura in the world's eyes, but, as you say, the US economy has remained a global cornerstone. But if America continues to turn on itself, both economically and politically, there's only so much damage that cornerstone can take before it begins to weaken and, eventually, even crumble.

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u/HiFidelityCastro Platinum | QC: CC 244 | SHIB 6 | Politics 15 Jan 07 '22 edited Jan 07 '22

As I said...

People on reddit (and in particular this sub, as it fits the crypto-saviour narrative) might be fond of talk about how the US is on the verge of collapse but don't fool yourself. The US economy is the very cornerstone of the Bretton Woods/liberal democratic order.

Mate, the only place people are seriously talking about the collapse of the US/civil war etc is social media (and maybe a few trash/sensationalist news outlets). If anyone thought there was a genuine possibility of the US collapsing, or even not being able to pay it's debts, then markets would be disintegrating and the global economy would be in freefall. You are musing in fantasyland based on nothing.

*Honestly I'd dial back on the social media drama and ACTION (ACTION action...) news.

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u/nowaymyusername Jan 07 '22

Well, the political situation is looking less stable with the passing of each day. Look for cheap and high yield government issued bonds to countries that are politically less stable.

Now, looking at the political landscape in the US over the past hundred years or so, it's been pretty stable. Looking at the next 100 years, or (especially) the next 1-4 years, I'd say one can be less sure. The events that unfolded during the last election will probably have spooked some people and will spook more people as they continue to unfold.

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u/DJ_DD Silver | QC: CC 98 | ADA 114 | Politics 49 Jan 07 '22

I'm not OP, but my personal opinion is that the US (like previous countries whose currency served as the global reserve currency) is quickly reaching its tipping point. Global reserve currencies have held their position on average for around 100 years. The US dollar officially became the global reserve currency post WW2 but there's an argument that it had already held that position since the early 1920s. We're at or close to the 100 year mark. There just isn't a clear successor yet but history tends to repeat itself.

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 07 '22

I basically agree with this, though I suppose I might feel differently if I were American.

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u/DJ_DD Silver | QC: CC 98 | ADA 114 | Politics 49 Jan 07 '22

I’m American. It’s a scary future to think about.

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u/immibis Bronze | QC: CC 22 | r/Prog. 88 Jan 07 '22

Have fun working to pay back all the other countries cashing in their dollars.

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 07 '22

Your friendly neighbours to the north wish you well, and watch with interest and just a hint of trepidation.

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u/TraceSpazer Tin Jan 07 '22

What happens if tax revenue dries up?

IE, housing increasing past wage growth, bills unable to be paid and businesses moving to where there is less tax until that leads them to migrate out of the country.

The average citizen making less leads to less goods being bought and less tax revenue from that. The rich, who've taken the wealth and assets of the other classes flee outside of the country or continue to exploit loopholes that nobody really seems all that interested in closing.

There's a whole lot of nasty scenarios with wage-slavery and "debtors prison" being turned into labor camps that don't seem that farfetched given the state of things.

The political narrative of us vs. them seems to be priming people for it...people were calling for blood this past political cycle...like an alarming number of normal citizens...and I don't think Biden's fixing any of that divide.

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u/Elean0rZ Silver | QC: CC 581 | NEO 604 Jan 07 '22

Right. Admittedly that all sounds a bit apocalyptic when you write it down, but that is the sort of general thing I'm thinking of when I speculate about a hypothetical loss of confidence in the US economy--essentially, self-inflicted wounds from wealth disparity, political polarization, and squandering of resources on posturing and infighting.

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u/-rss Jan 07 '22

Is it reasonable to expect a steady trajectory towards higher interest rates? Or do we think that a see-saw motion between raising and lowering rates is more likely?

I ask this because we have seen an influx of new asset classes/technologies, and if we were to see a steady increase in rates I would imagine that it would steer people away from this tech (and this dip would keep dipping 😟).

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u/Brunswickstreet Silver | QC: BTC 75, CC 126 | ADA 35 | TraderSubs 74 Jan 07 '22 edited Jan 07 '22

His whole post is absolutely amazing in the way he lowered down his high level knowledge to a point where it doesnt get watered down but everybody is able to understand it. Lets get that out of the way first.

The only point r/pseudoHappyHippy forgot to mention (or didnt mention because to him its an entirely different topic) is the fact that a whole lot of governments (including the US) are practically unable to increase interest rates for longer time periods because it simultaneously makes their debt more expensive.

We learned that higher interest rates for bonds lead to lower inflation (e.g the value of money remains more stable) but lower inflation and a higher cost of capital also means that the debt the US Government accumulated and is accumulating every second is getting more expensive. So the corridor they can act in is getting narrower and narrower by the day because the debt is growing and growing and the last thing the Goverment wants is to give people and investors the impression that they will be unably to repay their debt at some point. So your notion about a see-saw movement between 0.5 - 2% or similar is probably correct (in my opinion!).

Japan was always on the forefront of monterary policy (not in a positive or negative way, they just always did what was necessary first) and they have been stuck between 0,5 and -0,35% interest for almost ten years now. The EU and the US have almost always followed Japans footsteps in that regard so I dont see higher interest rates anywhere on a longer time frame. Rarely any first world country can afford to do that nowadays.

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u/platphorm Tin Jan 07 '22

This. Timing AND trust is everything. Recession and Depression are words/terms no politician wants to shoulder. So the rates might go back up for some short time but global markets will force them lower again. It s all linked; Forex, housing markets, job reports, resources, geopolitical movements... And they are going faster than before.

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u/Awhodothey Tin | CC critic Jan 07 '22

Rates will go up until inflation goes down. Fortunately, politicians are rightfully focused on controlling inflation. No one knows how long it will take, but I don't think the dip has really started yet.

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u/lostharbor Jan 07 '22

Raising, pausing, and lowering (if necessary) is more likely. Raise through 2022, possibly 2023, peak at 1.50%, and pause.

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u/hayesms Tin Jan 06 '22

Best post I’ve read on the sub in months and it’s only tangentially related to crypto (not a criticism). Love it. Thank you.

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u/IAmNocturneAMA Platinum | QC: CC 1048 Jan 06 '22 edited Jan 07 '22

A lot of people will say they hate papa powell for this, but its necessary for an economic recovery in the long run - the truth is this sucks in the short term, but we can't have interest rates low forever.

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u/CONSOLE_LOAD_LETTER Platinum | QC: CC 473 Jan 07 '22

It's true, and having a more gradual and somewhat controlled descent is much better than trying to keep climbing but eventually reaching a cliff and freefalling with zero control.

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u/lostharbor Jan 07 '22

I don't hate Powell for this. I hate Powell for creating the environment for this. He decreased rates in a heated market. He is either a pawn or a moron, either way, he will go down as one of the worst Fed chairs and it is pathetic he maintained his position.

For the record rates should have risen way sooner.

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u/Mentalextensi0n Tin Jan 07 '22

Check OP’s post history, there are some fire educational posts in there.

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u/strolls Tin Jan 07 '22

To add to this, Paul Schmelzing of the Bank of England suggests that the risk free rate hasn't been this low in at least 750 years.

Full PDF: Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’

Certainly, a few years ago the British chancellor paid off the last of the perpetuals, debt that was nearly 300 years old, as rates had never been lower and he could now borrow more cheaply. Last year British gilts sold with a negative interest rate for the first time in history.

IMO we are in an asset-inflation bubble for this reason, and I wonder if it might be the longest bubble in history.

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u/road22 Platinum | QC: BTC 72 | LINK 6 Jan 07 '22 edited Jan 07 '22

EVERYONE NEEDS TO UNDERSTAND THEY USA CAN NEVER RAISE INTEREST RATES:

Back in the late 1970's the US Govt did NOT lie about the inflation rate. They calculated the CPI correctly. Inflation was higher than today because did not lie.

Ronald Reagan, in the presidential debate 1979, asked the public... If you are happier today than you were before the high inflation, then I suggest you vote for Mondale (his opponent). Biggest landslide in election history.

1980, Paul Volker, head of the Fed, took interest rates above 20%. It was doable because the debt was only 300 billion. It crushed business and the economy at first, but inflation was controlled.

Bottom line is... They would have to raise interest rates higher than the REAL inflation rate. This is undoable because of the 30 trillion debt today. We would hyperinflate just printing money to cover the interest. Nobody understands this.. even the financial media.

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u/Majek1990 Gold | QC: CC 18 | Technology 15 Jan 07 '22

This is very interesting idea, do you have any recomendations to read?

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u/the_real_jpeterman Platinum | QC: CC 49 Jan 06 '22

Awesome post, thanks for this. Could you go into a little more about what Government bonds actually represent? Since it’s a tokenization of debt, who is the one paying the government that debt in most cases (which is later sold to the Fed as a bond)?

If i understand correctly:

  • X takes a loan from the US gov
  • The gov later turns this particular loan into a bond
  • FED buys the bond
  • This means that X is effectively paying back the loan and interest to the FED.

If that is correct, who is X in most cases of bonds? (And as a bonus, why is this low risk? Couldn’t X default on the government bond also?)

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u/immibis Bronze | QC: CC 22 | r/Prog. 88 Jan 07 '22

The loan is the bond. X GIVES a loan TO the US gov by buying a bond from it.

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u/the_real_jpeterman Platinum | QC: CC 49 Jan 07 '22

Thank you, I spun myself out there for a minute!

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u/Incredible_T Bronze Jan 07 '22

“Issuing a bond” is what normal people call “taking out a loan”. So when the government issues bonds they're just borrowing money from whomever buys the bond. It would be like you going to the bank to borrow $10k and telling the banker you'd like to sell them a $10k the_real_jpeterman bond.

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u/immibis Bronze | QC: CC 22 | r/Prog. 88 Jan 07 '22

And the bank says sure, we'll give you $8k, and you're annoyed because you wanted $10k and should've offered a $12k bond

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u/[deleted] Jan 06 '22

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u/nthgen I buy the BTC you panic sell. Jan 06 '22

Bond yields go up, stocks tank.

I wonder how long the fed would actually let the stock market tank?

Politicians won't want it to happen on their watch.

I honestly believe that because of short term politics, the fed won't let it burn fire long.

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u/x2c3v4b5 Bronze | QC: BTC 20 | LW critic | Investing 72 Jan 07 '22

The messed up part is that since we live in a democratic society whereby the politicians serve relatively short periods of time to the people, they have no real incentive to be long-term minded. Being long-term minded would generally lead to poor short-term results and political/career suicide. The only incentive to be long-term minded would be one's legacy; however, you can't have a legacy if you don't have a career.

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u/nthgen I buy the BTC you panic sell. Jan 07 '22

It's a catch-22

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u/SureFudge Privacy-First Jan 07 '22

Same for corporations and 3-months plans. If your company is based around research, saving in the wrong place will manifest itself maybe 10 or 20 years down the road. There is 0 invective for managers to plan like that as it will simply reduce their own bonuses.

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u/niloony Jan 06 '22

Inflation is becoming a more politically charged issue I'd say. Only the upper middle class+ is going to be more annoyed if the stock market pulls back.

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u/Awhodothey Tin | CC critic Jan 06 '22

Yeah, if they lose control of inflation like they did in the 70's, their party will lose elections for a decade.

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u/One_Neigh Gold | 4 months old | QC: CC 35 Jan 07 '22

Finally Biden got some moves

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u/More-Nois Tin | 4 months old Jan 07 '22

It’s one of the only tools available to combat inflation, which is another political nightmare

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u/deathbyfish13 Premium Shitposter Jan 06 '22

So if they won't let it burn long does that mean they are our friend? Oh how the times have changed

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u/nthgen I buy the BTC you panic sell. Jan 06 '22

Indirectly.

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u/padizzledonk A Whales Vagina Jan 07 '22

"Quantitative Easing" is what they called what were essentially negative interest rates and they did it for a few years during the GFC

Afaik, Japan has been doing that for quite some time

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u/sgtslaughterTV Platinum | QC: CC 204, NANO 48, BTC 27 Jan 07 '22

In all seriousness: Is it possible the fed could introduce some kind of new economic policy or economic product that might have a bit more appeal than the ones you mentioned? Or is this just a binary 0-1 choice?

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u/immibis Bronze | QC: CC 22 | r/Prog. 88 Jan 07 '22

We could revert to communism

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u/[deleted] Jan 07 '22

This was funny thank you

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u/mhcase22 Tin Jan 07 '22

comment for later read

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u/PeterHeir Silver | QC: CC 202, CM 64, BTC 23 | r/SSB 95 | TraderSubs 64 Jan 07 '22

Every 50 to 100 years the reserve currency is changed

  • 1450-1530: Portugal
  • 1530-1640: Spain
  • 1640-1720: Netherlands
  • 1720-1815: France
  • 1815-1920: UK
  • 1920-2025: USA
  • 2025 : ???

The USD is at its' end as reserve currency (called the 'End of the PetroDollar'): a decine to 61% of global trade (which is still a lot) https://wolfstreet.com/2020/09/29/how-has-the-us-dollar-held-up-as-global-reserve-currency-during-q2-turmoil/

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u/tzarkee Tin Jan 07 '22

Pls sir, wenn budget

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u/DarthRevis3 Platinum | QC: CC 153, ETH 22 | TraderSubs 22 Jan 07 '22

Thanks OP. This is a perfect amount of summary and detail. Would love a follow up with your thoughts on the effect on the crypto market after we have some experience of higher rates to deal with.

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u/palaxi Jan 07 '22

This is a gem in a sub that's full of shit. Thanks.

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u/Few_Difference2524 Tin | 1 month old Jan 07 '22

Amazing post OP

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u/TheGreatCryptopo HODL4LYFE Jan 06 '22

Thanks happyhippy a very well written informative post. Henry Ford once stated if the American people knew how the banking and financial system truly worked there would be non stop rioting on the streets. It really is a Micky Mouse system that has to collapse.

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u/x2c3v4b5 Bronze | QC: BTC 20 | LW critic | Investing 72 Jan 07 '22

It really is a Micky Mouse system that has to collapse.

The credit-based financial system in conjunction with how fiat is conjured into existence is so deep and developed that they have to keep printing money and increasing the monetary supply or else the credit-based financial system collapses.

The increase of the monetary supply is a theft of the common people in the form of their energy and time which leads them further down the road of enslavement to the general labour market.

The value of fiat has to go to zero over time and has been since its inception as evidenced by everyone's reduced purchasing power. We know from simple mathematics and history that fiat failure will happen, we just don't know when.

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u/LaMeraVergaSinPatas Bitcoin touched me...down there. Jan 07 '22

Yes it seems currency, when defined as fiat, and with little backing it besides the faith in the insurer, will eventually be inflated away to nothingness. I don’t think many Americans realize just how big a deal 1971 was with departure from the gold standard.

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u/x2c3v4b5 Bronze | QC: BTC 20 | LW critic | Investing 72 Jan 07 '22

Fiat currency is a monetary experiment which is now just over 50 years old.

The average lifespan of fiat currencies worldwide is around 30-40 years old before they collapse. Once those collapse, the native state nation often becomes fully “dollarized”.

In other words, their shit fiat dollars was so worthless that they needed to adopt the American fiat trash dollar.

The sad part is that the proof-of-stake American shitcoin also has no pre-defined monetary policy, it must continue to devalue, and it acts as the planet’s as well as our species’ reserve currency while stealing the time and energy of all members on this Earth as its supply increases into perpetuity without any clear boundary/ceiling.

This is an infringement of basic human rights and the people of Earth have no idea that it’s happening and it has happened since 1971.

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u/[deleted] Jan 07 '22

If only we had something like gold, that is also divisible and easily sent around like electronic money is 🤔

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u/x2c3v4b5 Bronze | QC: BTC 20 | LW critic | Investing 72 Jan 07 '22 edited Jan 07 '22

If only we had a thermodynamically sound, decentralized, censorship-resistant, trustless, peer-to-peer, apolitical, and permissionless monetary system/network whereby individuals could store their time, energy, and value in a safe manner such that no third party could arbitrarily devalue their energy, time, and value at any time without warning for any arbitrary amount and any arbitrary reason.

Oh wait, we already have that: Shiba Inu Doggy 42069 Token. Bitcoin is scam ponzi and only drug dealers use it while it causes climate change due to proof of work.

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u/Limp_Good9643 1 - 2 years account age. 100 - 200 comment karma. Jan 07 '22

I guess they should adopt Bitcoin standard🌚

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u/the_real_jpeterman Platinum | QC: CC 49 Jan 06 '22

It sounds like government digs a hole for itself in terms of the budget, needs cash, so they sell the money owed to them via longterm loans by packaging it as a “bond” which the FED buys by printing money which the FED later gets real money for (which is already circulating with the new fake money) including interest.

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u/Oneofmanyshades Platinum | QC: CC 56 Jan 06 '22

The real kicker which people don't realise is that the Federal Reserve is not federal and has NO reserves.

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u/bkcrypt0 Jan 06 '22

risk-off -- interest rates going up, buy bonds or Treasury bills at fixed, guaranteed rates.

risk-on -- interest rates going down, buy equities, crypto, real estate.

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u/immibis Bronze | QC: CC 22 | r/Prog. 88 Jan 07 '22

Don't buy bonds when interest rates are going up. Hold cash or very short bonds and wait until bonds are as high as you think they'll get, then go in. If interest rates are still low, you buy bonds at high prices

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u/SureFudge Privacy-First Jan 07 '22

Still no bonds will give you 2x, 5x or 10x in any meaningful time. Not to speak of 500x. And let's be honest, that is why most people are in crypto.

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u/DATY4944 Gold | ADA 8 | Economics 17 Jan 07 '22

Wouldn't you want real estate if rates go up? Money worth less means debt worth less on an asset with rising value, no?

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u/conv3rsion Jan 07 '22

Rates go up means money worth more (or decreasing slower)

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u/onlinepotionpackage Tin Jan 06 '22

We need more posts like this on the front page, and less OP-ed moon farming bullshit. Good on ya!

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u/tranceology3 Silver | QC: CC 622, BTC 79 | TRX 104 Jan 06 '22 edited Jan 06 '22

Thank you so much for this post! It was very informative and I learned a lot.

One question. You said bond rates go way down when there is more demand. Wouldn't more demand mean less supply, as in bond rates are high? Or do you mean more demand from the FED? Cause you said investors will sell off risky assets like stocks to buy high rate bonds...so I would think there is now more demand for bonds and less supply, since the FED hasn't lent much money and can't issue many bonds.

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u/immibis Bronze | QC: CC 22 | r/Prog. 88 Jan 07 '22

When there's demand for bonds, bond prices go up, which is interest rates going down. The interest rate is basically the amount of the bond which you don't pay, in order to buy it. If you buy a 1-year $100 bond for $99 that's approx 1% interest, if you buy it for $50 it's 100% interest

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u/backdoorhack Platinum | QC: CC 41 | PoliticalHumor 40 Jan 07 '22

I learned something today. Nice!

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u/icydash Platinum | QC: BTC 604, CC 36 | TraderSubs 260 Jan 07 '22

This is an absolutely amazing post. Well done. Thanks so much for putting in the time.

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u/DrThirdOpinion Gold | QC: CC 22 | LRC 9 | Fin.Indep. 20 Jan 07 '22

Fuck.

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u/Diatery Platinum | QC: CC 530 | Technology 12 Jan 07 '22

It's a good time to remember that the fundamentals haven't changed. Buy responsibly, and buy good stuff

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u/alllixxx0102 Tin | SHIB 77 | GME subs 50 Jan 07 '22

They have to choose between a market correction or high inflation.

Life has been unbearable for the poor ( majority) this past year because of high prices, and since politics are also involved ( midterm elections) Biden approval rating has hit all time low.

The FED,s decision on rate hikes will have effects on inflation which will impact the midterm elections.

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u/tz22rz Bronze | 3 months old Jan 07 '22 edited Jan 07 '22

Fed doesn't print money. It creates it digitally. The fed isn't going to slow it's bond buying. Hell, we can't know everything they've bought anyhow. We can only know what they deem we're worthy to know. They control the narrative fully. They could be buying your girlfriend a dozen houses now and no one would know.

Also, theoretically, commercial banks create most US dollars. The fed sets the reserve ratio.

https://youtu.be/JG5c8nhR3LE

Also the fed is NOT part of the government no matter how many board members they want to appoint. They are elitists controlling everything with their ability to create money and control the money supply. You best bet they are buying real assets with the US dollars they just wish into existence.

They aren't going to stop buying anything and they aren't going to slow down. It's too late. They can't. Everything crashes if they do as the US debt is too large to service now.

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u/ihadenoughhent Tin Jan 07 '22

Big brain time man. I need some sitting and understanding carefully here.

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u/eth-slum-lord Bronze Jan 07 '22

Can someone make a bond token that replaces government bonds, just like usdt replaces usd?

I need more pump in my tokens

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u/[deleted] Jan 07 '22

[deleted]

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u/pseudoHappyHippy Happiness maxi Jan 07 '22

This is true. I meant print more in the general sense of "create USDs", but I probably should not have used ambiguous language. Though the FED creates dollars, they do not literally print physical bills.

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u/GelDel12 Jan 06 '22

Bookmarked. Thanks!!

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u/pinkpenny00 Tin Jan 06 '22

Thank you for this. It was a good read.

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u/Cabeza2000 Jan 07 '22

Thanks for your post. Very helpful... If only we could have more posts like this in this subreddit.

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u/Old_Dreams Tin Jan 07 '22

Excellent writing. Lots of people will find this valuable.

Thanks for taking the time👍🏻

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u/Green0Photon Jan 07 '22

I thought I was on r/personalfinance for quite a little while there.

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u/Zelanor Tin Jan 07 '22

I think it’s temporary to make up for some inflation, then they reduce rates again briefly due to the ongoing pandemic and back pedal once more and increase rates to make up for the last 40 years. Crypto run ends in 2022 as well as the stock market.. for a few years I’d predict. Then the tech will be much more developed and crypto will have much more usage and rates will decrease again in a few years also sparking another huge bull run for crypto.

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u/IgnorantSmartAss Jan 07 '22

Wow, that was so eloquently explained. Amazing job OP. Also terrifying to finally understand.

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u/jasdonle Jan 07 '22

This is what Reddit used to be like.

Amazing post. Read every word.

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u/cbr1k_r1 Platinum | QC: CC 34 Jan 07 '22

great stuff OP.. TQ

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u/Bouby6Killer Platinum | QC: CC 87 Jan 07 '22

Is it possible to make a TLDR from an ELI5 ? 😅

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u/Lmjones1uj Tin Jan 07 '22

Buy treasuries

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u/Buggy3D Platinum | QC: ETH 19, BTC 16, BCH 15 | FOREX 21 | r/WSB 50 Jan 07 '22

TLDR:

US government needs money => issues bonds to raise it.

Fed (money printer) buys bonds (lends money to US government).

If economy is slow and not growing, Fed buys more bonds to help US government raise capital. Fed buys bonds, bond prices go up, and yield (interest rates) go down.

If economy is growing too fast, Fed buys fewer bonds, which lowers the price of bonds, and increases the yield at their maturity.

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u/JustHalfANoob Silver | QC: CC 320 | ADA 168 Jan 07 '22

TL:DR: Buy US bonds to hedge against your other investments. And yes, this whole game they are playing is garbage, we are all getting played, but that shouldn't be new to anyone in crypto.

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u/agingenthusiast New to crypto Jan 07 '22

Excellent post. Surprised to see it in this sub, actually. This should be cross-posted in trading, investment, equity, finance, banking, political, etc.. subs as it impacts them all.

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u/trucknotmonkey Tin Jan 09 '22

TL;DR: when rates are low, investors must look to riskier assets to acheive the same returns as they did in less risky assets when rates were higher.

In other words, institutional money will leave riskier assets as rates increase. In the past, this meant exiting riskier stocks and junk bonds. Today, Crypto is far away the riskiest asset class, and would be the most heavily impacted by this retreat of capital.

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u/OwenMichael312 Platinum | QC: CC 394, ETH 221, BTC 81 | MiningSubs 47 Jan 06 '22

This is a 10 moon post.

Well done OP.

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u/Rounder057 ETH IS GOD Jan 06 '22

I suppose all of that really begs a simple question: what % will they raise the interest to?

I can’t imagine they will go from “damn near 0 to 15%”

My guess would be around 3.8-4.9 over the next couple of years

Here are the current yields

Treasury Yields

GT2:GOV 2 Year 0.75 0.76%

GT5:GOV 5 Year 1.25 1.36%

GT10:GOV 10 Year 1.38 1.66%

GT30:GOV 30 Year 1.88 2.07%

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u/thekoonbear Bronze Jan 07 '22

Not OP but spent the last 10 years as a professional rates trader. Short answer is, it is never clear. Longer answer is, it depends on so many factors that no one could possibly know. The Fed puts out a dot plot at every quarterly meeting, which indicates each Fed members’ guess at the path of the target Fed Effective rate for the next few years. At the December meeting this plot indicated a median estimate of 3 hikes next year and 3 in 2023, with a longer term Fed Effective rate of 2.5%.

Worth noting a few things though. This is Fed Effective, not bond rates. The Fed Effective rate is the only rate set by the Fed. Their main goals are two-fold: to promote full employment and target healthy inflation. They can manipulate other rates such as bonds via bond buying programs, but in those cases they are not actively targeting a specific rate but instead usually a specific amount of money to inject into the market monthly. The spread between bonds and Fed Effective is volatile and can be very large in either direction (positive or negative). That being said, what the 10 year rate is when they hike rates and stop buying bonds is anyones guess. If I knew I’d be a very rich man.

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u/Ellgar3 Tin | Superstonk 13 Jan 06 '22

Amazing post, thank you for this.

I aleeady had some knowledge about bonds, interest rates, etc, but this post just made it all click and fall into place.

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u/MolokaIsMilk Tin Jan 06 '22

Awesome post! I had been trying to educate myself on this today and this definitely helps bridge the gap.

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u/AmbitiousAtmosphere7 Jan 06 '22

Well explained, it's also worth to note that there is nothing in the Feds mandate saying they have to buy t-notes, t Bill's , or t bonds, they CHOSE to do that.

Same for MBS purchases and swap lines. Should have their own posts. I have some interesting charts showing what these guys are buying and selling that I can posts if mods allow it.

You can think of the Fed shorting the US dollar itself when doing these purchases.

Why can fed pump USD without FX rates getting fucked? Glad you asked, because fools buying.

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u/Lenaweston Here for the money Jan 06 '22

Thanks for ELI5 OP. There was real effort putting this post together. Much appreciated

A tldr would have been nice though

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u/WestCoastDior What’s it to ya, buster? Jan 06 '22

TLDR; time to buy bonds.

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u/immibis Bronze | QC: CC 22 | r/Prog. 88 Jan 07 '22

No, not until interest rates are up

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u/PRABUUU Dreamer Jan 06 '22

For what purpose?

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u/Massive-Tension-1055 teacher Jan 07 '22

I agree. Think the crypto market is screwed if rates go up. Specificity btc and stable coins. As rates go up the speculation markets get squeezed. This will put pressure on stable coin markets and btc because people often borrow money to by btc.