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re: What's the probability CPI is lower than expected tomorrow?
Posted on 3/14/23 at 8:14 am to Bass Tiger
Posted on 3/14/23 at 8:14 am to Bass Tiger
CPI stands for “child predator inoffice” and its 100%
Posted on 3/14/23 at 8:15 am to el Gaucho
quote:
CPI stands for “child predator inoffice” and its 100%
Posted on 3/14/23 at 8:19 am to Bass Tiger
I’m not a monetary expert by any means but with banking flashing some stress signals it may be time to chill for a bit on the hikes.. let’s see how this mess works it’s way through the system
Posted on 3/14/23 at 10:26 am to deeprig9
quote:There is no such thing as an "asset reserve" for treasury securities. Banks are required to maintain loan loss reserves for, well, LOANS. But treasury securities aren't considered loans to customers and are "risk weighted" at 0% for reserve purposes.
If a bank has Tbonds at 2% as an asset reserve
quote:That's just wrong. To determine how much a bond loses market value when rates change you have to know the bonds modified duration.
2% as an asset reserve, then the government starts issuing them at 4%, what is the liquid value of that 2% bond now? The bank's reserves have just been cut in half.
For example, using the formula for modified duration, a recently issued 5 year treasury security with a 2% coupon rate has a modified duration of approximately* 8.8, which means for every 1% change in interest rates the bond's market value will change by about 8.8%.
So if rates go up to 4% the bond will lose approximately 17.6% of its market value not 50%.
Using the same interest rates as the example above, if the treasury security is a 2 year security issued at 2% coupon rate, the modified duration is approximately 1.95. So it will drop in market value by approximately 3.9% if market rates go to 4% on such bonds.
approximately* The value is approximate because the modified duration formula is a derivative formula. You will remember from your college calculus class that if you plot the results of a derivative formula on a graph the results are not a straight line but a parabolic (curved) line so any value is approximate based on where on the curved line you're looking.
This post was edited on 3/14/23 at 10:30 am
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