Tuesday, April 24, 2007
Perceptions of financial risk
Things with the same yield
30 year TreasuriesThis raises a lot of very interesting questions regarding the market's current perception of relative risk. I'm not sure what the answers are, but I suspect that some of these instruments will prove to have been mispriced.
2-year Fannie Mae Benchmark Notes
2-year Freddie Mac reference Notes
World Bank 2-year notes
Mexican Global 2-year notes
Brazilian 2-year notes
Colombian Global 2-year notes
Chilean 2-year notes
Peruvian 2-year notes
2-year Citigroup notes
5 Comments:
By 
, at
Tue Apr 24, 05:49:00 PM:
Every financial instrument that ever traded was mispriced - it just took a bit of time to determine whether the seller or the buyer was the one doing the mispricing.
By 
Unknown, at
Tue Apr 24, 07:27:00 PM:
That's a wonderful bit of understatement, saying you "suspect some of these instruments will prove to have been mispriced". Care to tell us which of the instruments in question qualify?
Since the yield curve has been so flat for so long, you would normally expect a recession would be in prospect. Todays housing numbers would ordinarily be even more evidence that's what's happening, and the falling consumer confidence and recent declines in consumer spending would also be thrown in for consideration. But jobs and incomes are holding up. Consumer savings are actually up, for a change, in the most recent income report. In my own business, software, our pipeline is building- which has never happened going into an economic slowdown in the sixteen years we've been in business. Mixed signals, yes, but I very much hope the Congress doesn't decide to raise taxes as dramatically as they've been thinking about. Looks like colossally bad timing to me.
By , at
Tue Apr 24, 09:18:00 PM:
Just one example of the problems of paper assets. Think I will hold on to my silver for a bit longer.
By Purple Avenger, at
Wed Apr 25, 06:51:00 AM:
but I very much hope the Congress doesn't decide to raise taxes as dramatically as they've been thinking about
They have to raise taxes. Can't bash Bush's tax cuts and then NOT raise taxes.
By Cardinalpark, at
Wed Apr 25, 08:48:00 AM:
CV's observation is spot on and unquestionably a phenomenon driven by the extraordinary liquidity in global markets at the moment. When that liquidity recedes, as it always does, all of these securities will probably have proven to be priced dear. However, if I were to call out those that will be most vulnerable:
All "emerging markets" securities will be hurt the most by receding liquidity, in the following order: Peru, Colombia, Mexico, Brazil, Chile.
Then US corporates - Citi
Then those with govt backing - World Bank, Fannie, Freddie
In that type of environment, the 30 year treasury might be viewed as a safe haven and may rally...maybe.
As for the catalyst to reduced liquidity: Fed hikes and tax hikes. I'm not so sure the democrats are dumb enough to saw off the plank our economy is on. While they may monkey around with estate tax stuff and maybe cap gains at the margin (good for PR), they may try to reduce the AMT burden, which is a big problem about which they seem to care.
Watch the Fed.
