Comments on: Historic Day for the 30 Year Bond http://www.aleablog.com/historic-day-for-the-30-year-bond/ Alea Jacta Est Wed, 03 Mar 2010 18:43:34 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: jck http://www.aleablog.com/historic-day-for-the-30-year-bond/#comment-2065 jck Fri, 21 Nov 2008 10:57:06 +0000 http://www.aleablog.com/?p=2040#comment-2065 Steve L: It is not abnormal for TIPS to yield more than plain vanilla treasuries, the TIPS do NOT have a 0% inflation floor, only the principal <em>at maturity</em> has a par floor, it can be adjusted below par before that, see this (from the <a href="http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_faq.htm" rel="nofollow">treasury</a>): <b>What happens to TIPS if deflation occurs?</b> The principal is adjusted downward, and your interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same. You have this safeguard: at maturity, if the adjusted principal is less than the security's original principal, you are paid the original principal. Steve L:
It is not abnormal for TIPS to yield more than plain vanilla treasuries, the TIPS do NOT have a 0% inflation floor, only the principal at maturity has a par floor, it can be adjusted below par before that, see this (from the treasury):

What happens to TIPS if deflation occurs?
The principal is adjusted downward, and your interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same. You have this safeguard: at maturity, if the adjusted principal is less than the security’s original principal, you are paid the original principal.

]]> By: barry http://www.aleablog.com/historic-day-for-the-30-year-bond/#comment-2064 barry Fri, 21 Nov 2008 01:48:11 +0000 http://www.aleablog.com/?p=2040#comment-2064 I just got a call from an NYC bank -- their system can handle neither negative spreads nor negative rates (as could happen with Tbills). Also looks like the valuation on hundreds of legacy CMT swaps are failing becuase of the negative spreads. At least the banks hope the valutions are failing. I just got a call from an NYC bank — their system can handle neither negative spreads nor negative rates (as could happen with Tbills).

Also looks like the valuation on hundreds of legacy CMT swaps are failing becuase of the negative spreads. At least the banks hope the valutions are failing.

]]> By: Steve L http://www.aleablog.com/historic-day-for-the-30-year-bond/#comment-2063 Steve L Thu, 20 Nov 2008 23:46:27 +0000 http://www.aleablog.com/?p=2040#comment-2063 Systems engineers are having to reckon with more than just negative swap spreads... the yield on the 10yr TIPS was below the 10yr T-note yield today a few times (and closed 1bp apart). Since the notes have a floor at 0% inflation, there's no possible inflation number which can produce that result. Some models then vary other parameters and end up with really wacky forward rates. Systems engineers are having to reckon with more than just negative swap spreads… the yield on the 10yr TIPS was below the 10yr T-note yield today a few times (and closed 1bp apart). Since the notes have a floor at 0% inflation, there’s no possible inflation number which can produce that result. Some models then vary other parameters and end up with really wacky forward rates.

]]> By: jck http://www.aleablog.com/historic-day-for-the-30-year-bond/#comment-2062 jck Thu, 20 Nov 2008 22:44:45 +0000 http://www.aleablog.com/?p=2040#comment-2062 That reminds me when silver went above $10, computer wasn't ready... I suspect we are going to hear about some serious damage with the negative swap spreads... That reminds me when silver went above $10, computer wasn’t ready…
I suspect we are going to hear about some serious damage with the negative swap spreads…

]]> By: barry http://www.aleablog.com/historic-day-for-the-30-year-bond/#comment-2061 barry Thu, 20 Nov 2008 22:15:23 +0000 http://www.aleablog.com/?p=2040#comment-2061 Absolutely stunning! At least our cost of borrowing should go down! A lot of amusing problems though. I was just called in to help resolve a problem at a hedge fund. Their risk systems can't handle negative swap spreads (you just can't enter a negative number for the swap spread)! Absolutely stunning! At least our cost of borrowing should go down!

A lot of amusing problems though. I was just called in to help resolve a problem at a hedge fund. Their risk systems can’t handle negative swap spreads (you just can’t enter a negative number for the swap spread)!

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