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Liquidity premium

by henrycopeland
Sunday, March 15th, 2009


The 8.875 percent 30-year bond that the government sold in February 1989 yields 0.44 percentage point, or 44 basis points, more than the current 10-year 2.75 percent note, which is the most comparable security and yields 2.89 percent. That amounts to about $44,000 a year in interest on a $10 million investment.

In laymen’s language: current buyers of US treasuries are not long-term investors, but flight-to-quality money-stashers. Not a sound base for an rate curve and a sign of much higher rates to come. And higher rates mean fewer home buyers & slower economy.

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