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0 pointshelen___keller3y ago0 comments

> When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount.

That’s only true for fixed rate debt, which is common to think about for Americans due to the popularity of the 30 year fixed rate mortgage but in many countries ARMs are more popular or most popular.

In theory, fixed rate debt products should be priced in to reflect interest rate risk as well, so it’s hard to say the creditors are losers per se.

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lesam3y ago

Creditors definitely do lose money when they price debt at 2% but inflation runs at 7%.

Talking about mortgages misses the larger fixed rate bond market (government and company long term debt).

helen___kellerOP3y ago

Yes but what I’m saying is all fixed rate debt prices in interest rate risk. Any one creditor could be in a bad spot, but a creditor holding lots of fixed rate debt can / should be hedging against that risk.

When we’re talking about institutions with billions of dollars (and not joe lending Bobby $20), I wouldn’t call them a loser unless they specifically failed to properly hedge their positions.

lesam3y ago

How would you hedge interest rate risk on trillions of dollars in US treasuries? Who takes the other side of that trade, and why? I don’t think that sort of hedge exists.

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geoduck143y ago

This makes me wonder if Fannie Mae and Freddie Mac have hedged all of the fixed rate mortgages they have lent money for.

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0 pointshelen___keller3y ago0 comments

> When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount.

In theory, fixed rate debt products should be priced in to reflect interest rate risk as well, so it’s hard to say the creditors are losers per se.

0 comments

lesam3y ago

Creditors definitely do lose money when they price debt at 2% but inflation runs at 7%.

Talking about mortgages misses the larger fixed rate bond market (government and company long term debt).

helen___kellerOP3y ago

When we’re talking about institutions with billions of dollars (and not joe lending Bobby $20), I wouldn’t call them a loser unless they specifically failed to properly hedge their positions.

lesam3y ago

How would you hedge interest rate risk on trillions of dollars in US treasuries? Who takes the other side of that trade, and why? I don’t think that sort of hedge exists.

2 more replies

geoduck143y ago

This makes me wonder if Fannie Mae and Freddie Mac have hedged all of the fixed rate mortgages they have lent money for.

1 more reply

j / k navigate · click thread line to collapse