tag:blogger.com,1999:blog-11027528911364475.post2690340368230351766..comments2024-02-18T21:10:05.205-08:00Comments on EconomPic: Bond Math: Duration Risk at the Zero BoundaryJakehttp://www.blogger.com/profile/07946497592651234440noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-11027528911364475.post-58430972101182766392012-02-09T21:31:06.696-08:002012-02-09T21:31:06.696-08:00Farmland Investing- ready that. Great, great piece...Farmland Investing- ready that. Great, great piece.Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-29263895086770114612012-02-09T21:29:37.104-08:002012-02-09T21:29:37.104-08:00"Is your point that if (a) it makes sense to ..."Is your point that if (a) it makes sense to buy bonds when rates are 5% because rates can fall by 5% or go up by 5%+, then (b) it doesn't make sense to buy bonds when rates are 1% because they can only fall by 1% but can go up by 5%+?"<br /><br />Exactly (and much better said). Capital appreciation is limited by the zero boundary. To the extreme, assume rates are 0% at five years. At that point there isn't a single reason to allocate to a five year Treasury (unless as you mention, rates could move negative).<br /><br />To respond to your point on 100 bp moves at 5% or 1%... at low rates, Treasury bonds actually appreciate more for each bp move due to convexity, but the asymmetry is the issue.Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-51402639479244390602012-02-09T11:05:26.373-08:002012-02-09T11:05:26.373-08:00Jake - I'm not sure I get your point (and sinc...Jake - I'm not sure I get your point (and since you normally make interesting points, I fear I may be missing it).<br /><br />It seems like you're comparing the effect of a 400bps move (5%-->1%) with a 100bps move (1%-->0%). Of course they're different. But isn't the effect of a 100bps move the same, regardless of of whether it's 5%-->4%, or 1%-->0%?<br /><br />Is your point that if (a) it makes sense to buy bonds when rates are 5% because rates can fall by 5% or go up by 5%+, then (b) it doesn't make sense to buy bonds when rates are 1% because they can only fall by 1% but can go up by 5%+?<br /><br />Is it the asymmetric nature of the risk/reward that you are pointing out? Because the duration math should be the same regardless of where you start out (I think).<br /><br />---<br /><br />Delong has written (tongue only partially in cheek) about how one might effectuate negative nominal interest rates when real rates are very negative, in order to remove that zero-lower-bound on nominal rates (cash at 0% nominal is always an option vs. negative nominal T-notes, unless you're dealing in $ millions).<br /><br />Hussman has also written on liquidity preferences and how they constrain the Fed near the zero bound (and hence massively expose its balance sheet to risk).Anonymoushttps://www.blogger.com/profile/05037715549911352465noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-49766485395013362272012-02-09T11:03:26.548-08:002012-02-09T11:03:26.548-08:00Great piece on Warren Buffet saying that bonds are...Great piece on Warren Buffet saying that bonds are among the most dangerous investments out there now -http://www.businessweek.com/news/2012-02-09/buffett-says-bonds-among-most-dangerous-assets-on-inflation.htmlfarmland investinghttp://www.greenworldbvi.com/alternative-investments-options/agricultural-farmland/noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-52417933709034822332012-02-09T01:06:07.328-08:002012-02-09T01:06:07.328-08:00Point taken and agree (to an extent). I'm also...Point taken and agree (to an extent). I'm also in cash vs short term treasuries (for my preservation of capital allocation) so there you go.Jakehttps://www.blogger.com/profile/07946497592651234440noreply@blogger.comtag:blogger.com,1999:blog-11027528911364475.post-60479415502767343872012-02-09T00:35:02.245-08:002012-02-09T00:35:02.245-08:00I think it's a mistake to assume that "Th...I think it's a mistake to assume that "The Fed has made it clear there is zero risk that rates will rise going out to at least 2014." From where we are standing now, yeah we can envision rates not rising until 2014, but what would happen if at the next meeting, Bernanke decides that rates will rise in 2013 or later this year, especially if the economy continues to improve? Frankly, I don't know, but I do not think it's correct that speculators should ever set in stone anything the Fed says.Wu Di Capital, LLChttps://www.blogger.com/profile/13947624168435964663noreply@blogger.com