bonds
by
charleshughsmith
Executive Summary
- The critical role of interest rates and carry trades
- How capital flows across borders
- The growth in supply of dollars is slowing
- The rationale for the dollar strengthening from here by 50-100%
If you have not yet read Is Part 1: The Dollar May Remain Strong For Longer Than We Think available free to all readers, please click here to read it first.
In Part 1, we reviewed the key concepts that drive supply/demand (and thus the price/relative value) of the U.S. dollar. In Part 2, we’ll cover the dynamics that could push the value of the USD vis-à-vis other currencies much higher in the years ahead.
Interest Rates, Bonds and Carry Trades
To understand the price of any currency—measured in other currencies, gold, oil, etc.—we look at a currency as a special kind of commodity, one that greases transactional trade of goods and services and also serves as a store of value. Like any commodity, its price relative to other commodities is determined by supply and demand.
If demand is strong and supply is tight, the value will increase. This is the same for dollars, gold, oil, grain, bat guano, etc. The reverse is equally true: if demand slackens and supply balloons, the value will decline.
To understand the supply and demand for currencies, we need to understand the role of interest rates, sovereign bonds and carry trades.
The connection between interest rates and demand is self-explanatory: if interest rates paid at home are near-zero, and another nation’s bonds are paying a higher yield, it makes sense to sell (or borrow) one’s own currency and buy a bond denominated in another currency.
This is the foundation of currency carry trades. PP.com’s own Davefairtex recently offered an excellent explanation of how carry trades work on the Gold & Silver Group forum:
I believe that QE causes inflation in other countries by dropping rates to 0% which encourages carry trades, whereby traders borrow USD for extremely low rates here in the US, and then send it overseas to find a yield. Cheap money in the US causes money to flow elsewhere, where rates are higher.
Carry Trade For Dummies:
Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.
Step 2) Trade $1 billion US for 1.075 billion AUD.
Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%
Step 4) Collect $23 million USD/year for doing no work at all.
Carry trades work in both directions for the dollar…
Why the Dollar Could Strengthen – A Lot – From Here
PREVIEW by charleshughsmithExecutive Summary
- The critical role of interest rates and carry trades
- How capital flows across borders
- The growth in supply of dollars is slowing
- The rationale for the dollar strengthening from here by 50-100%
If you have not yet read Is Part 1: The Dollar May Remain Strong For Longer Than We Think available free to all readers, please click here to read it first.
In Part 1, we reviewed the key concepts that drive supply/demand (and thus the price/relative value) of the U.S. dollar. In Part 2, we’ll cover the dynamics that could push the value of the USD vis-à-vis other currencies much higher in the years ahead.
Interest Rates, Bonds and Carry Trades
To understand the price of any currency—measured in other currencies, gold, oil, etc.—we look at a currency as a special kind of commodity, one that greases transactional trade of goods and services and also serves as a store of value. Like any commodity, its price relative to other commodities is determined by supply and demand.
If demand is strong and supply is tight, the value will increase. This is the same for dollars, gold, oil, grain, bat guano, etc. The reverse is equally true: if demand slackens and supply balloons, the value will decline.
To understand the supply and demand for currencies, we need to understand the role of interest rates, sovereign bonds and carry trades.
The connection between interest rates and demand is self-explanatory: if interest rates paid at home are near-zero, and another nation’s bonds are paying a higher yield, it makes sense to sell (or borrow) one’s own currency and buy a bond denominated in another currency.
This is the foundation of currency carry trades. PP.com’s own Davefairtex recently offered an excellent explanation of how carry trades work on the Gold & Silver Group forum:
I believe that QE causes inflation in other countries by dropping rates to 0% which encourages carry trades, whereby traders borrow USD for extremely low rates here in the US, and then send it overseas to find a yield. Cheap money in the US causes money to flow elsewhere, where rates are higher.
Carry Trade For Dummies:
Step 1) Borrow $1 billion US at LIBOR-1M rate; cost 0.16%.
Step 2) Trade $1 billion US for 1.075 billion AUD.
Step 3) Buy 1.075 billion 2-year AUD govt bonds; yield 2.52%
Step 4) Collect $23 million USD/year for doing no work at all.
Carry trades work in both directions for the dollar…
by
Adam Taggart
by
Brian Pretti
by
Chris Martenson
Executive Summary
- How sovereign debt is becoming larger and more mis-priced each year
- Why corporate borrowing is accelerating, but only being used for non-productive means
- Junk bonds have never been priced so low (ever), indicating a complete denial of risk
- Today's record bond prices are supported by near-historic low (i.e. extremely tenuous) levels of volume
- Why, mathematically, nearly no-one will be able to exit unscathed when this overinflated market rolls over
If you have not yet read Is Part 1: I Blame The Central Banks available free to all readers, please click here to read it first.
Italy: Insanity On Display
Let’s look at one of the sovereign entities that has piled on the debt to staggering levels. In this case: Italy.
This can serve as a template for understanding the rest of the insanity that exists in the global sovereign bond market.
The rules for lending to a nation should be roughly the same as lending to an individual. You’ve got some measure of the country's credit-worthiness that needs to be taken into account, plus an assessment of its income.
After all, the future principal and interest payments have to come from future income. If there’s too much debt compared to income, then there’s an increasing risk that the debt servicing payments not only will not be made, but cannot be made.
Italy’s sovereign debt has been expanding enormously as the government borrows and spends. Its national debt finally cleared more than $2 trillion euros early in 2014:
Italy's public debt hits record 2.1072 trillion euros
Apr 14, 2014
(ANSAmed) – ROME, APRIL 14 – Italy's massive public debt hit a record 2.1072 trillion euros in February, the central bank reported Monday. The amount was up 17.5 billion euros since January, the Bank of Italy said.
The European Commission has criticized Italy's 2014 budget for not doing enough to bring down debt, around 132% of gross domestic product (GDP).
As a result it has put Italy under "specific monitoring" over its "excessive macroeconomic imbalances", which include high debt and poor competitiveness, as part of an in-depth review.
(Source)
Italy raked up significant debt at a far faster rate than its underlying economy was growing, leading to a steadily rising debt-to-GDP ratio as seen in this next chart…
Something Very Wicked This Way Comes
PREVIEW by Chris MartensonExecutive Summary
- How sovereign debt is becoming larger and more mis-priced each year
- Why corporate borrowing is accelerating, but only being used for non-productive means
- Junk bonds have never been priced so low (ever), indicating a complete denial of risk
- Today's record bond prices are supported by near-historic low (i.e. extremely tenuous) levels of volume
- Why, mathematically, nearly no-one will be able to exit unscathed when this overinflated market rolls over
If you have not yet read Is Part 1: I Blame The Central Banks available free to all readers, please click here to read it first.
Italy: Insanity On Display
Let’s look at one of the sovereign entities that has piled on the debt to staggering levels. In this case: Italy.
This can serve as a template for understanding the rest of the insanity that exists in the global sovereign bond market.
The rules for lending to a nation should be roughly the same as lending to an individual. You’ve got some measure of the country's credit-worthiness that needs to be taken into account, plus an assessment of its income.
After all, the future principal and interest payments have to come from future income. If there’s too much debt compared to income, then there’s an increasing risk that the debt servicing payments not only will not be made, but cannot be made.
Italy’s sovereign debt has been expanding enormously as the government borrows and spends. Its national debt finally cleared more than $2 trillion euros early in 2014:
Italy's public debt hits record 2.1072 trillion euros
Apr 14, 2014
(ANSAmed) – ROME, APRIL 14 – Italy's massive public debt hit a record 2.1072 trillion euros in February, the central bank reported Monday. The amount was up 17.5 billion euros since January, the Bank of Italy said.
The European Commission has criticized Italy's 2014 budget for not doing enough to bring down debt, around 132% of gross domestic product (GDP).
As a result it has put Italy under "specific monitoring" over its "excessive macroeconomic imbalances", which include high debt and poor competitiveness, as part of an in-depth review.
(Source)
Italy raked up significant debt at a far faster rate than its underlying economy was growing, leading to a steadily rising debt-to-GDP ratio as seen in this next chart…
by
Chris Martenson
David Stockman, former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier is an insider's insider. Few people understand the ways in which both Washington DC, The Fed, and Wall Street work and intersect better than he does.
He's extremely concerned by the "perfect storm" he sees of concurrent failures in US policy across foreign, monetary, economic, fiscal fronts:
David Stockman: The Collapse of the American Imperium
by Chris MartensonDavid Stockman, former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier is an insider's insider. Few people understand the ways in which both Washington DC, The Fed, and Wall Street work and intersect better than he does.
He's extremely concerned by the "perfect storm" he sees of concurrent failures in US policy across foreign, monetary, economic, fiscal fronts:
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