An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Sunday, August 28, 2016
Bond Price as a function of Duration and change in rate
Chart shows the decrease in bond price vs. change in interest rates for some different durations.
Some large losses indicated in the lower right of the table.
The market price of the bond declines but the total yield to maturity of the bond already owned doesn't change, so an owner isn't like an owner of an equity that has to fear actual losses and panic sells, unless they've taken on duration they don't have...or leveraged their holdings so market prices are important, they know to the penny how much they will receive in every period they own the bond, so the market price isn't terribly important. Now with negative rates, all bets are off. The losses are real and the prices purely speculative.
Jose if US starts raising in earnest it may create a positive reinforcement for Brazil exporters who will raise prices in USD terms and Brazil CB might end up wanting to raise instead blowing the lid off the whole thing...
The market price of the bond declines but the total yield to maturity of the bond already owned doesn't change, so an owner isn't like an owner of an equity that has to fear actual losses and panic sells, unless they've taken on duration they don't have...or leveraged their holdings so market prices are important, they know to the penny how much they will receive in every period they own the bond, so the market price isn't terribly important. Now with negative rates, all bets are off. The losses are real and the prices purely speculative.
ReplyDeleteIn high interest rate Brazil (the very opposite of ZIRP and NIRP), the relevant chart would picture decreases instead of increases in yields.
ReplyDelete:)
Jose if US starts raising in earnest it may create a positive reinforcement for Brazil exporters who will raise prices in USD terms and Brazil CB might end up wanting to raise instead blowing the lid off the whole thing...
ReplyDelete