RE: "Since the 30 year bond pays almost the same interest as a short term T-Bill one has to assume that the average investor believes that there is no risk in the US for at least the next 30 years."
I believe that there is a relationship between risk, interest rates, and inflation. Let me give the following examples:
1. If the average investor believes that there is "no risk in the US for at least the next 30 years," then, in order for the investor to buy a 5.8% 30-year bond, the investor thinks that inflation will average about 2.8% for 30 years. This will give him a real rate of return of about 3%.
2. If the average investor believes that there is a very slight risk in US government bonds for the next 30 years, then, in order for the investor to buy a 5.8% 30-year bond, the investor must believe that the inflation rate will average perhaps 1.8% over the next 30 years. This way, his real rate of return will be about 4%, which will reward him for the slight risk he sees.
3. If the average investor believes that there is a larger degree of risk in US bonds, then, in order for the investor to buy a 30-year bond at 5.8%, the investor must believe that the inflation rate will average 0.0% for the next 30 years. He expects his real rate of return to be 5.8% to compensate him for the extra risk.
The above percentages are purely examples. My point is that the rate of inflation is also considered along with the risk and yield.
Best wishes,
I2 |
