Downgrade could also affect Fannie, Freddie, and even some muni debt...$16 trillion worth!

[dkf]

The ratings firm said any downgrade would also affect government-backed debt of Fannie Mae and Freddie Mac, which are crucial conduits of housing finance, as well as the Federal Home Loan Banks and Federal Farm Credit Banks, and all related debt. Combined with Treasurys, that amounts to more than $16 trillion of debt. Some 7,000 states and municipalities could also be hit, along with bonds issued by the governments of Israel and Egypt that are guaranteed by the U.S. government.

http://online.wsj.com/article/SB10001424052702303406104576444003129534580.html

[nadinbrzezinski]

1. Like I've been saying the morning after will not be nice

and outside the experience of most Americans... lets just say interest rates will go up, just for starters. And I mean this in the best of ways, WAY UP.

[dkf]

3. The government backs so many things too...

What happens to the risk free rate?

[A HERETIC I AM]

6. I'm curious, but what do you mean exactly by that term: "the risk free rate"?

What exactly are you speaking of?

Do you have any idea at all what is meant by the term "risk free rate" and what it refers to?

[dkf]

11. What Does Risk-Free Rate Of Return Mean?

The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

Investopedia explains Risk-Free Rate Of Return

In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.

http://www.investopedia.com/terms/r/risk-freerate.asp

[A HERETIC I AM]

13. And what is it right now? n/t

[nadinbrzezinski]

15. Self delete

[A HERETIC I AM]

18. OK...look...I'm not trying to be a pain in the ass here, I just want to know if you really

understand what you just posted.

From the page you linked, it states that the

"One-Year Treasury Constant Maturity" had a yield "this week" of 0.19, A month ago of 0.18, and one year ago of 0.31.

Do you understand that line enough to translate it into actual dollars and cents?

Again, do you know what it means?

Regarding your response below, Madam, I am VERY familiar with the various types of US Government debt. I understand how it issued, I understand how the interest is paid and I understand their various maturities. What I'm wondering is if you actually have any idea at all what the difference is in actual dollars and cents, between 0.19% and 0.31% to the holder of a single one of those "one year" debt instruments.

Please stop searching Google and tell me what you know.


edit spelling. It's late

[nadinbrzezinski]

20. Not worth it

[A HERETIC I AM]

22. WRONG!!! WRONG WRONG WRONG.

And why am I not surprised?

You are wrong, Nadin.

Those rates are NOT the weekly rate. The quotes you got from Bankrate or that you will get from this Bloomberg page are ANNUALIZED rates. That is the rate the instrument pays on a YEARLY basis, not weekly.

It isn't "19 cents for this week" for "each dollar invested".

You clearly have no idea what the hell you are talking about, I'm sorry to say.

US Treasury debt is issued in $1000 "Par" increments. All debt issues of shorter than 2 years are what are known as "Zero Coupon" bonds, meaning that they are sold at a discount to the above mentioned Par and they mature at par. The difference is your rate on an annualized basis.

If you look at the Bloomberg page I linked above, it says that current yield for the 6-month bill is .06%. That means if you buy one today that matures in 6 months, you will realize a gain of THIRTY CENTS over the course of those 6 months on your $1000 face value note. If you rolled it into another immediately on maturity at the same rate, you would realize your .06% annual rate, or $.60.

Sixty Cents. Over a year. Not 19 cents a fucking week.

In other words, that bond bought today would cost you $999.70 and in 6 months you would get a grand back.


"What is so hard"?

What is so hard is that there are so many people on DU who talk as if they have a clue how bonds are calculated and clearly have no fucking idea what they are talking about and others take them seriously.

[nadinbrzezinski]

23. Not worth it

[A HERETIC I AM]

25. Please. And LOL! (After noticing you deleted your posts)

I did not say, nor do I even think for a second that rates will not go up if Congress doesn't do the right thing and raise the debt limit.

In most instances, I find you reasonably well informed and insightful You have experiences which shed light on things many DU'rs aren't aware of. However, it bothers me whenever I see this sort of conversation when it is clear the participants have no idea how it translates in real terms.

US Treasury Debt is redeemable in and its interest payments are made by Federal Reserve Notes. The fact is, we can issue as much debt as we want because we own the fucking printing presses to pay it off! Of course, doing so willy nilly is extremely inflationary and it needs to be controlled. THAT'S the real worry here. It isn't as if, as you suggested, that they won't be honored or that no one will get their money back or that they will stop trading. It is that buyers will demand a higher yield because of the higher perceived risk. That will cause the price of these instruments traded on the secondary market to plummet and new issues at auction will have their yields bid up in the case of the zero coupons and their coupon rates bid up in the case of the long bonds.

Are you aware that you can still purchase 30 year bonds issued in the early 1990's that have an 8% coupon? That's a $1000 face value bond that pays $80/year in interest payments. You can buy them from any brokerage with a bond desk. It's just that at current yields, their price has been bid up to about 140 cents on the dollar.

If by deleting your posts above and thereby suggesting it isn't worth it to be proven wrong instead of simply, graciously saying "You're right, I'm wrong" perhaps you shouldn't put forward opinions on subjects of which you do not grasp the basics of.

[nadinbrzezinski]

27. Again not worth it

thanks for the correction, but NOT worth it.

[sudopod]

28. Brutal. nt

[nadinbrzezinski]

30. Why I said it wasn't worth it... should put person

on ignore in-fact

[tkmorris]

32. I have no idea why you would do that

That poster TAUGHT you something, something valuable, if you will but take the time to understand it. When faced with knowledge you did not possess, particularly in those situations where you have egg on your face because you were acting as if you already knew what you were talking about, it is best to respond with class, with dignity, and grace. To "eat your peas", if you will. Attempting to delete what you had posted does not change that you were wrong; it only makes obvious your desire that no one KNOW about it.

You are a valuable asset to this community Nadine, but you would fare better to stop trying to an expert on everything and simply stick to what you know.

[nadinbrzezinski]

33. Not over teaching, but how it was done

not worth it...

It was not just me who saw it... brutal sums it.

By the way... you are sure that interest rates will not go up? If you do, everybody who happens to be AN ECONOMIST disagrees... so no, I am not ignorant of these issues.

Oh and not just that... 3% annualized comes to about what I said... a week.

On the bright side, if they go up to 20-25% it will attract FOREIGN investors looking for high yield, higher risk investments...

[A HERETIC I AM]

34. Just in case you have yet to put me on ignore, if I hurt your feelings, I'm sorry.

I admit I had a few beers in me by that time late last night - well, early this morning and I let the alcohol get the better of my decorum. I am sorry for the tone I took, as it was unnecessary and unwarranted.

However, it wasn't me who came after you as if you were an unruly kid at the back of the class who just won't get it, it was you with your "What is so hard?" post. I simply asked you and "dkf" if you understood what it was you were actually referring to.

As I mentioned, there are many subjects on which you seem to be very well versed and you offer information that is often valuable. But you were, and continue to be wrong in the way you describe (or fail to) the answer to my primary question; What exactly is referred to by the statement "Risk free rate?"

The dictionary definition is easy to find, but the fact is, the internationally recognized financial instrument that offers the true risk free rate of return is the Ten Year Treasury. THAT is the answer I was hoping you would give me. Not the 90 day, not the 6 month or even the two year. Why? Because the US Treasury has issued ten year bonds for decades now and has NEVER missed an interest payment nor have they ever failed to redeem a series upon maturity at par. The ten year also carries a significant coupon rate, paid in bi-annual interest payments that when totaled, equal the percentage given as "coupon" on any quote page for the security. (most recent issue is 3.125%) A 3.125 coupon pays $31.25 per year per each $1000 face value note, divided into two payments of $15.625 each. If you only held one, they would send you $15.63 the first payment and $15.62 the second, if I am not mistaken. The entire financial world and all the traders in it, from Hong Kong to London to Frankfurt to Sao Paulo recognize this fact. When a place to store money is needed that WILL return what it says it will return, traders all over the world turn to the Ten Year.

On edit to add the following;
It is also important to note that Treasuries settle "Same Day" instead of the "Trade plus 3" that is the case with almost every other security transaction. That plus the fact that the secondary Treasury market is just about the MOST liquid market on the planet - you can find a buyer for virtually any amount of any series of this paper in a matter of minutes or at the most a few hours - means that they are attractive instruments to hold.

Your statement above that "3% annualized comes to about what I said... a week. is again, Wrong. In your post from last night that you deleted, you stated that the .19 figure reported for the one-year note meant you were paid nineteen cents per one dollar per week. $.19 a week PER DOLLAR amounts to $9880 in interest payments on a single $1000 note. That is CLEARLY not possible nor realistic, nor is it "about what I said... a week" as a 3% annual rate equates to $30.00/yr or 57.6923 cents per week or .000577 cents per dollar (of the $1000 note) per week.

You asked a question in your post above that seems to be directed at me, as the poster you responded to said nothing about interest rates. So, if you are indeed asking me "you are sure that interest rates will not go up? If you do, everybody who happens to be AN ECONOMIST disagrees... so no, I am not ignorant of these issues.", again I say that I in no way think interest rates will NOT go up if this entire fiasco isn't resolved properly. The question is by how much? 25%? It's possible I suppose, but I don't think it is likely. If rates do go up that high, we had better hope that they suspend the auctions for a period cause having the Treasury pay that sort of interest rate on short term paper will surely bankrupt this country.

A couple of things should be noted about the bonds the Treasury issues;

During Clintons second term they STOPPED issuing 30 year bonds. Why? Because Clinton balanced the budget and there was no need to issue long term paper. Any coupon rate on the 30 year over 3.33% means the holder will realize a doubling of his money by the time the bond matures. That is NOT good. That means we borrow a grand at a time from people and by the time the bond matures 30 years later, the interest and the repayment of the bond equals two grand. The current coupon on the 30 year is 4.375%. Again, not good for the balance sheet.

They started issuing 30 year paper again during Bush's 1st term. Why? Because that asshole lowered the top marginal rate, started two wars, created a massive, expensive new Government agency and ran the debt up like it was free.

If we could completely fund the government with 90 day paper, we could do it for literally peanuts. Unfortunately there isn't enough demand for such low yields (10 cents a year per bond currently) to sell the billions needed every week.

I'm sorry if I came off like a dick, Nadine, but very often you put yourself up as an expert on various subjects. On this one, you quite frankly stepped right into it with both feet. While much of this is minutiae to many and might seem insignificant, it is important to try and understand what is being talked about when these terms are bandied about. You performed a disservice to your readers by making statements that are just simply incorrect.

[dkf]

31. That isn't the significance of the risk free rate.

The problem is that a lot of financial concepts rest on the calculation of a risk free rate. If it's distorted by default risk how are we supposed to measure things?

[dkf]

16. Google "uses of risk free rate" and see all the different models and calculations that use it.

[A HERETIC I AM]

19. LOL....ok...sure.

So you DON'T know.

Got it.

[dkf]

21. Oh for goodness sakes I use the annualized CG 90 Day Treasury Bill Index

And I use the return for whatever period I am looking at.

[nadinbrzezinski]

7. delete

[A HERETIC I AM]

10. And I'll ask you the same question.

Wat exactly is the "risk free rate" and what does it refer to?

Any idea?

[nadinbrzezinski]

12. delete

[A HERETIC I AM]

14. Excellent use of Google.

Now. WHAT EXACTLY is it?

Which T-Bill? At what rate? What is it right now?

See, I'm just curious if you really know what the hell you are talking about, that's all.

[nadinbrzezinski]

17. delete

[pnwmom]

4. Yes. Many people seem to have no idea this will only make our budget problems

worse. Much, much worse.

[aquart]

2. Lawrence has been so good on this:

Asking what things will like after defaulting is like asking what life will be like after committing suicide.

[nadinbrzezinski]

8. And he is correct

except that you are still here. The suicide victim is not.

An approximation, think Argentina, Mexico and Chile all wrapped into one, with Greece for good measure.

Of course Great Depression will sum it up well too.

[ProgressiveEconomist]

5. (SARCASM) 'Scare tactics' from the WSJ? Has any reporter asked GOP presidential front-runner

Bachmann about this articie?

Has anybody been reading the WSJ regularly the last couple of months? Has their coverage been this thorough, or did WSJ-owner News Corp politicize the debt ceiling story until the Murdoch hacking scandal put them under an investigative microscope?

[nadinbrzezinski]

9. Actually WS is sending smoke signals and they are using

the WSJ, among others, for that right now.

You can count of MANY calls being placed to certain people to try to 'xplain the realities of life to the children in DC.

As to Bachman... she has no clue about economics, or anything else for that matter.

[kenny blankenship]

24. Finally, the real Terrorists present their demands.

I hope the NSA has a fix on their transmitter and the USAF has plotted a firing solution.

[Mojorabbit]

26. Can anyone tell me the reason

the US guarantees egyptian and israeli bonds?

[A HERETIC I AM]

29. Stability in the region.

Without looking it up, I'll bet it was started under Carter and the Camp David Accords.

Shore up their economies by backing their debt and you have financial and therefore political stability.