Greek 1 year bond at 110% interest..get 'em while you can!!!

[dixiegrrrrl]

Seriously, that IS what can happen to our bonds, too, ya know.
Was 108% just a few hours ago.

[A HERETIC I AM]

1. That's not interest.

It's yield.

There's a difference.

And if you actually think a 12 month US Treasury is ever going to go to 108% yield, you're fooling yourself.

[evilDonkey]

2. yield vs interest rate

The fact that the bond yield has surged to over 100% indicates that investors believe the Greek government will default. I don't know what the interest rate is on the Greek 1 year but I doubt it's anywhere close to 100%. A normal interest rate combined with a crazy high yield like 100% means that the value of this bond has fallen to almost nothing.

Investopedia:http://www.investopedia.com/university/bonds/bonds3.asp#axzz1XnT3Rlci">Bond Basics: Yield, Price And Other Confusion

As far as the US government is concerned it has two choices.

A) Default on it's debt
B) Borrow money until it triggers hyperinflation so it can default on it's debt

Peak oil, demographics, massive debt and a hundred other factors are grinding growth to a halt in the 1st world.

Can the yield on the 12 month US Treasury go to 108%? It may take years but sooner or later it's inevitable.

Brace for impact.

[A HERETIC I AM]

3. Thanks for the education, bub.

And trust me, I don't need an Investopedia reference to know the difference between interest rate and yield.

They are two distinctly different things.

I don't know what the interest rate is on the Greek 1 year but I doubt it's anywhere close to 100%. A normal interest rate combined with a crazy high yield like 100% means that the value of this bond has fallen to almost nothing.

Actually, it is pretty simple to figure out. It means the value of a note with 12 months to maturity that has a yield of 108% is currently selling for somewhere around 42 cents on the dollar.

Since the OP didn't post a link to the site where she got the screenshot, and I was unable to find via several Google searches a similar graph, I have no idea whether or not a Greek 12 month note carries a coupon. It is highly unlikely it does, as damned few bonds of such short maturity do. As a consequence, it is what is known as a "Zero Coupon Bond" and that means it is sold at a discount to its face value, matures at its face value and the difference is the yield. Zero coupon bonds do not pay interest, as there is no coupon rate and therefore no coupon (interest) payments.

This is happening on the secondary market, NOT at issuance. If the trend continues, the Greek government will either issue such paper at 50% of its face value to come closer in line to what the market is bidding existing paper at or they will stop issuing such paper altogether.

Whether or not your or the OP's prediction of yield on US Treasury 12 month paper getting to 108%....well......not bloody likely.

But hey. I suppose it could happen. I hope I'm dead when it does, because we'll be well and truly fucked long before it ever got to that point.

[evilDonkey]

4. You are correct

You are correct this is all happening in the secondary market. If it was happening in the primary market a yield of 108% would indicate an interest rate of 108% because the bond hasn't had a chance to rise or fall on the open market yet. Or am I missing something on Yield?

Whether or not your or the OP's prediction of yield on US Treasury 12 month paper getting to 108%....well......not bloody likely.

It's not only likely it's a mathematical certainty.

The only wild card might be the invention of some amazing, wealth producing technology that surges our GDP up and to the right.

If the economies of the 1st world continue to grow at 2% and their debts continue to grow at 10% an interest rate surge followed by default is only a matter of time.

[dixiegrrrrl]

6. "Its not only likely it's a mathematical certainty."

Thank you.

[evilDonkey]

7. yield on Greek 1 year

Actually, it is pretty simple to figure out. It means the value of a note with 12 months to maturity that has a yield of 108% is currently selling for somewhere around 42 cents on the dollar.

If the yield on the 1 year started at around 10% and it's now over 100% doesn't that mean this bond is trading at less then 10 cents on the dollar or thereabouts?

Who would pay 42 cents on the dollar for Greek debt that's probably headed for default in days or even hours?

[A HERETIC I AM]

8. Bonds of this type, just like most bonds, have a "Par" value at which they are redeemed.

In this country that Par value is $1000.00.

12 month paper in this country is auctioned by the Federal Reserve Bank of New York on behalf of the US Treasury and they are sold at a discount to that par. Currently 12 month US paper has a yield of .09%. In real dollar terms, that means if you buy one of these notes it will cost you roughly $999.10 and in twelve months the Treasury will send you $1000.

I do not know what the par value of a 12 month Greek note is, but I am would surmise it is likely one thousand Euro, but I could be wrong. Either way, it will mature (provided they don't default, and as far as that goes, I do not dispute the possibility or that this is certainly being priced in) at its Par, be that one thousand Euro or 500 Drachma or whatever.

The answer to your question: "If the yield on the 1 year started at around 10% and it's now over 100% doesn't that mean this bond is trading at less then 10 cents on the dollar or thereabouts?" is no, it doesn't. If similar US paper was sold at a 10% yield then it would price just above $900 per bond. If it went to a 50% yield the bonds would be bid down to about $667.

Here's a bond calculator that will bear this out;

http://www.moneychimp.com/calculator/bond_yield_calculator.htm

Make sure the "Par Value" field reads "1000".
In the "Coupon" field type "0" (zero) and in the "Years to Maturity" field type "1" (one)
In the "Current Price" field, type "480" and you'll find the yield will work out to be around 108%


On edit to say, the other day I said the price would be about 42 cents on the dollar. Obviously I was wrong, by 6 percentage points. I apologize, as I didn't search for and use the above linked bond calculator.

[evilDonkey]

9. Very interesting.

Thanks, I ran it through on the calculator. Very interesting.

Ok so basically It's double or nothing. If I put in $480 and I win I get $1000. If they default and I lose I get far less than $1,000 all of the way down to nothing.

I can't believe anyone would take that bet with Greece on the verge of default. I'd want odds of at least 5 or 10 to 1. At 2 to 1 odds I might as well go to Vegas and bet on black. At least my odds are 50/50.

Maybe investors are betting that in the event of a default the bond holder will only take a 50% haircut and they'll be even.

[A HERETIC I AM]

10. Well, that's just about it, yeah.

I am by no means an international bond trader, but if I was, I would be thinking that the only reason the price on this paper hasn't fallen to next to nothing is that something will happen. Something.

Either the German central bank will step in, the US Federal Reserve will do something, England will back stop them.....something.

You're probably not far from the mark in that the 50% haircut is a possible alternative. That would mean instead of these being redeemed at par, they are redeemed at half that. In that case,, had you bought some of these notes at 42% or 48% of par or whatever, you would still come out ahead, albeit by only a few percentage points, not by 108.

To briefly expand on that idea, those that are buying these up at that big yield will do fine. Those that paid much more for them will lose.

[dixiegrrrrl]

5. You are, of course, correct, my typo could not be corrected in time.

here is the source for the article and the graf:


http://www.bloomberg.com/apps/quote?ticker=GGGB1YR:IND

[evilDonkey]

11. Yield on Greek one year tops 130%!

Bloomberg http://www.bloomberg.com/apps/quote?ticker=GGGB1YR:IND">Greece Govt Bond 1 Year Yield

Right now it's at 131.87%