Email of the day on bond market risk
Comment of the Day

April 27 2020

Commentary by Eoin Treacy

Email of the day on bond market risk

Thanks for the regular coverage. I have been a subscriber for a long time, and find this really the only voice of sanity and unbiased views. So, thanks. Could you elaborate on the statement you mentioned where the bond investors should be cautious because / if majority of the bonds are held by the government. Also, could you kindly help think through and elaborate how the fed would deal with the following - exits from the agency papers the Fed is buying. Is there any limit on how much the Fed can buy in this program? - how will the fed deal with losses in the Junk bond ETFs if there were to be defaults? Are the losses guaranteed b6 the Treasury?

Eoin Treacy's view

Thank you for your kind words and long-term support. Governments very seldom pay back their debt. Instead they are more interested in the cost of servicing the total relative to other spending priorities. As interest rates have trended lower, the cost of servicing has followed, even as the overall quantity of debt has increased. That has created a situation where if interest rates rise, for any reason, the ability of the US government to fund itself will be impaired.

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