Bond Economics
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A blog for analysis of bond market economics. Follow this blog to find articles on how to develop models to analyse economies or fixed income securities.
Bond Economics
2d ago
I have been racking up a lot of consulting hours recently, so my writing has been on a back burner. I have also been looking at my two manuscripts (the inflation book, and the banking primer), without having new content to publish here.
I have decided that I am not going to add new content to my banking primer. I need to consolidate all my “banking theory” pieces into one or two chapters, and that would make the book at my target length (novella, not novel length). Rather than tackle that now, I have turned back to my inflation manuscript. The advantage of a being a long time separated from ..read more
Bond Economics
1w ago
I finally have my kitchen back, and now can devote more time to writing and consulting. I am still pushing another project, so my output here will probably be limited. I have taken another look at my bank primer project, and realised that I have too much content — I will need to trim back the theoretical wrangling texts that I previously wrote. With today’s article, I think I have covered most of the content I want to be in the book, although I might stick in some cursory analysis of a few different banks’ balance sheets. For example, I might compare some teeny-tiny American bank versus large ..read more
Bond Economics
1M ago
After a hiatus resulting from various disturbances, I am back with another book manuscript section. I just reworked this section, and hopefully did not introduce major issues into it. However, I wanted to get this out before next week. Right now, my main concern in life is getting my kitchen sink back.
This section introduces credit spreads from a bond pricing perspective. Looking at bonds is not completely inappropriate, as banks do hold bonds in their liquidity portfolio. The illiquid loans on bank balance sheets can be analysed in the same way, albeit bankers might use different terminol ..read more
Bond Economics
1M ago
The Fed started what might develop into a rate cut campaign by reducing the target rate by 50 basis points. It looks like Chairman Powell has decided to take “Gradualism” behind the barn and put it out of its misery.
I have returned from an unplanned trip, caught some kind of virus, have a new consulting project, and half the main floor of my house is being refitted. As such, I have been even less on top of current economic events than usual. I am just putting this article up to let readers know that I am still around and thinking of them. My main concern is finishing off the next section o ..read more
Bond Economics
1M ago
Status update. I had to take an unplanned trip, while at the same time starting a new consulting project. I focussed on the project before I left, and I now have some time to do some writing while away from home. This is the latest instalment of my draft manuscript, which is a brief discussion of wholesale payments systems. I might beef up the discussions further. International payments is another variant topic, but I may shy away from opening that can of worms.
Wholesale payments systems are the glue that ties the banking system together. These systems allow banks to make monetary transfer ..read more
Bond Economics
2M ago
This article is an unedited draft section from my banking manuscript. It finishes off the chapter on risk management.
The focus of this book is on how bank lending and liquidity flows interact with the wider economy. So long as credit losses remain at acceptable levels, they do not interrupt those flows. Given that the focus is elsewhere, this section will just offer a high-level perspective on how banks manage credit risk, without attempting to discuss what strategies individual banks use to analyse credit risk. Although this section will mainly refer to lending decisions, liquidity provis ..read more
Bond Economics
2M ago
I realise that I have tempted fate with my article headline, but I am just referring to a current popular meme on Twitter (“nothing happens”). In this case, I am referring to the drop in panic with regards to the yen carry trade (and whatever else people were worrying about, like “repo pods”).
To repeat once again my monotonous point: financial crises generally need some form of credit event to make them interesting. Risk assets losing value will cause some leveraged players to blow up. (Pretty much any exciting market movement can ultimately be traced to one or more hedge funds shifting of ..read more
Bond Economics
2M ago
I have a need to rant as a result of recent discussion of yet another Universal Basic Income (UBI) study on Twitter. Rather than deal with the ugly political realities of a UBI, UBI proponents insist on doing studies on a tangential topic (how do people spend regular cash grants?).
I use a standard definition of a UBI where all living adult citizens receive a fixed monthly payment from the government. The idea is that the fixed monthly payment provides a guaranteed minimal standard of living without any other income sources needed.
The Only UBI Study You Need
The only UBI study you need to do ..read more
Bond Economics
3M ago
This article is a draft section from my banking manuscript. It fits into a chapter on bank risk management. This article is an introduction to basic bankruptcy procedures, which needs to be understood before worrying about how banks manage the risk of their customers defaulting. This version of the section includes some text about bank resolution procedures that was previously published (but modified here).
Before discussing credit risk management, we need to give some background on credit risk itself. In most cases, credit losses will result from restructurings or bankruptcy procedures. This ..read more
Bond Economics
3M ago
I imagine that innumerable newsletters are writing the equivalent of “the markets are being roiled by volatility.” (When things are being roiled, you know it’s bad.) With the immediate disclaimer that I do not have much in the way of useful market data, I do not see anything that the Fed should immediately care about.
What matters to the central bank is that credit is available to finance capitalist activity. This means that the trip wire for a crisis that it will care about is disruptions to core funding markets. These are money markets, interbank markets, and wacky things like cross-curren ..read more