Comments on: The Long Bond Yield Also Rises

By: David Nowakowski

David Nowakowski — Mon, 26 Jan 2009 16:55:51 +0000

Hold on, hold on. Yes, Greek spreads of +300bp are the same as Poland’s (in fact, Poland issued a 2014 bond at 5.95% on Thurs, Greece issued earlier in the week, raising EUR 5.5 billion at 5.5%), and seem worrisome. But 6% yields. Six. Percent. European Union and Eurozone entry are still the gift that keeps on giving for these formerly vulnerable, crisis-prone countries.
Spain, the S in PIIGS, issued 15 and 30 years at 4.8 and 4.9%. My fellow bond market vigilantes gave them EUR 12bn.
If we end up in a deflationary world, these bonds will be great investments, as DOCJAH says above. But if there is a genuine crisis, and these countries default — ouch, it’s not priced in, and it will be hugely painful and lead to another big round of economic and financial strife. Or if the Fed and ECB are successful reflating, then this is a transfer of wealth from savers to borrowers. No free lunch, the value of these bonds will be inflated away, and/or the price will plummet as rates are raised to tame inflation. SJ’s warning is precisely that we should watch carefully what central banks do.
Still, in a time of crisis and risk aversion, 6% yields are pretty good (nowhere near the really dodgy debt of Indonesia or Romania’s 9+%, or Ukraine or Venezuela’s 20+%).

By: Zarkov

Zarkov — Fri, 23 Jan 2009 17:10:47 +0000

JJ’s suggestion is a logical and magnanimous gift to homeowners, particularly those who over-reached on their mortgages. But it seems rather inequitable to renters (1/3 of Americans, according to HUD) and to retirees who have paid off their mortgages. They get stuck with the grand inflation 2-3 years down the road, as this massive stimulus works its way through the financial system, as well as the increased national debt burden.

By: JJ Engler

JJ Engler — Fri, 23 Jan 2009 15:40:40 +0000

A very simple (and no doubt simplistic) remedy to the current banking debacle has been rattling around my head. I am mainly curious to know why it would NOT work.

As I understand it, outstanding mortgage debt is approximately $11 trillion in the US. The total number of residential mortgages is something like 60,000,000 (guess based on 2001 HUD data, when there were 50,000,000 mortgages). That is, on average, about $183,000 per unit.

If the Federal government were to give each homeowner, directly, a credit of $83,000 in debt reduction (administered directly through the bank holding the mortgage), the cost to the taxpayer and/or Federal Reserve printing presses would be $5 trillion, only slightly more than what has been spent (to little avail) over the past six months.

But wouldn’t such a direct reduction in homeowner debt actually have a much greater impact on the real economy as well as being more equitable? Consider:

1. Such an approach would effectively recapitalize the banks, which would trade mortgage debt for equity.
2. Lots of cash would land in consumer pockets to spend in the form of reduced monthly mortgage payments, reviving domestic demand and improving psychology.
3. It is progressive (since smaller mortgages generally are held by lower income people)
4. It would help to stabilize the residential real estate market.
5. It would help financial institutions to price their mortgage-backed derivatives, which would instantly have some additional value.
6. It is fair, since all homeowners would benefit, not just the boneheads who bit off more than they could chew.

Thoughts?

By: DOCJAH

DOCJAH — Fri, 23 Jan 2009 15:20:57 +0000

Some of us have been hiding in bonds for quite some time, — recognizing the wild speculation in the stock market as well as the deflationary environment. We see the prospect of growing national and municipal debt and the likely rise of interest rates. Can you offer any insights regarding likely interest rate ranges for 10yr and 30 yr bond rates 1-5 years out? Or is “the science” too inexact, the variables too unpredictable and your crystal ball too murky?