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Convoluted thoughts about regulatory frameworks
Halifax will sell me a 3-month bond paying 6.85%, a 6-month bond paying 6.5%, a 1-year bond paying 6.45%, a 3-year bond paying 6.4%, or a 5-year bond paying 6.2%.
I thought that longer terms were supposed to be rewarded by better interest rates; on the other hand, why shouldn't I jump at this?
If I assume that Halifax would rather borrow money on the money-markets, where LIBOR is 6.61%, than through the time-consuming process of assembling small sums from thousands of tiny savers, then I conclude that the money markets want to charge Halifax perceptibly more than 6.85%. I think that this means that they believe there is a chance of perceptibly more than 0.89% [(6.85 / 6.61) ^ (3/12)] that Halifax will be unable to repay.
On the other hand, I'm a small saver, and the regulatory framework likes small savers. If Lloyds lend Halifax fifteen million pounds, and Halifax goes bust, Lloyds get nothing back. If I lend Halifax fifteen thousand pounds, and Halifax goes bust, I get £13,700 back. So I should be more willing to lend Halifax money than Lloyds is - indeed, since the money is otherwise making 5.8%, I should lend it to Halifax if I believe the odds of Halifax still being around in mid-February are better than about 20:1 for.
This seems somehow counter-intuitive; on the other hand, I will go off to the local Halifax tomorrow with a chequebook. There is then the question of hedging: I wonder what odds the local Ladbrokes will offer on Halifax being bust by mid-February?
I thought that longer terms were supposed to be rewarded by better interest rates; on the other hand, why shouldn't I jump at this?
If I assume that Halifax would rather borrow money on the money-markets, where LIBOR is 6.61%, than through the time-consuming process of assembling small sums from thousands of tiny savers, then I conclude that the money markets want to charge Halifax perceptibly more than 6.85%. I think that this means that they believe there is a chance of perceptibly more than 0.89% [(6.85 / 6.61) ^ (3/12)] that Halifax will be unable to repay.
On the other hand, I'm a small saver, and the regulatory framework likes small savers. If Lloyds lend Halifax fifteen million pounds, and Halifax goes bust, Lloyds get nothing back. If I lend Halifax fifteen thousand pounds, and Halifax goes bust, I get £13,700 back. So I should be more willing to lend Halifax money than Lloyds is - indeed, since the money is otherwise making 5.8%, I should lend it to Halifax if I believe the odds of Halifax still being around in mid-February are better than about 20:1 for.
This seems somehow counter-intuitive; on the other hand, I will go off to the local Halifax tomorrow with a chequebook. There is then the question of hedging: I wonder what odds the local Ladbrokes will offer on Halifax being bust by mid-February?
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Usually they are. When they aren't, it's called an inverted yield curve, and it implies that the people offering those bonds see bad times ahead.
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I presume the decline in the really long terms is pure demography - though I got the impression that the long-term gilts are basically a regulatory accident to do with pension funds wanting risk-free investments of arbitrarily low return but maturing when people who've just opened a pension upon leaving university get round to retiring at 75.
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