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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Silver Super Bull who wrote (1758)	11/1/2003 10:10:35 PM
From: philv	Read Replies (1) \| Respond to of 110194

Debt obviously doesn't matter, and more debt doesn't matter so long as the interest rates are near zero. It is the debt service (interest) that breaks the camel's back. The principal can simple stay on the books as an asset because there is so much new paper available. No wonder Greenspan says interest rates will not be going up for a long time. That would kill the goose. Unrealistic low interest rates cause inflation in various sectors. Inflation is what the Feds want. High interest rates eventually kills.

To: Silver Super Bull who wrote (1758)	11/2/2003 9:25:48 AM
From: russwinter	Read Replies (1) \| Respond to of 110194

Well, actually it seems to me that supply is smothering bonds, forcing interest rates up. What I'm describing are desperate measures to contain things. Another piece of the puzzle we probably haven't gotten into much here is the convexity trade. I've tried to find (maybe someone else can, the advantage of a good board) a good analysis of it, especially about the risks to the financial system, but this definition at least will suffice: dwight.com and this one: poweredby.morningstar.com I would only add that the convexity trade works in reverse, not just when rates rise, but also when refi activity contracts. In otherwords we could have a period where 30 year mortgages sit at 6.0%, but duration gradually increases anyway, because prepayments from refinancing slows. I can also easily envision a scenario where folks just get stuck in their mortgages because they can't get their selling price, and can't save on a refi. That would setoff a duration bear market, and in turn put relentless pressure on treasury rates. The mortgage backed securities market has now easily surpassed (see chart, plus add a couple quarters since) the treasury market in size, making it the egg, not the chicken: arborresearch.com