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Donald van Deventer  

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  • U.S. Treasury Term Premium Reaches Negative 0.353% At 10 Years [View article]
    They've been addressed in a series of articles (more than 10) on both SeekingAlpha and in the blogs of http://bit.ly/12bxAjR and three publications by my partner Robert Jarrow which are linked in most of the other articles. A google search on "Robert Jarrow" will lead you there as well. In the interest of space, we don't repeat the explanations that are already publicly available. We'll add some links going forward to make that easier for those who aren't regular readers on this topic. I don't understand the rationale behind your last sentence but no explanation is necessary.
    May 6, 2015. 01:44 PM | Likes Like |Link to Comment
  • U.S. Treasury Term Premium Reaches Negative 0.353% At 10 Years [View article]
    Rich, thanks, I've been doing that in the past but have moved to a simulation instead of just forward rate calculations, so you'll see that in coming weeks. We're still playing catchup on the software. Appreciate the good suggestion.
    May 6, 2015. 12:29 PM | Likes Like |Link to Comment
  • U.S. Treasury Term Premium Reaches Negative 0.353% At 10 Years [View article]
    The references, especially Ben Bernanke's article, put this in context. There was no need to repeat his points because he did a fine job by himself without my help. Thanks for reading.
    May 6, 2015. 11:56 AM | Likes Like |Link to Comment
  • Eurobank Ergasias 1 Year Default Probability Up 1.00% To 24.25% Today [View instapost]
    Nick, many thanks again for the kind words and the offer of leadership in Greece. Lately my colleagues have chained me to my desk so that they can have all of the fun trips but maybe there will be an exception one day. Good luck and let us know how we can help. We're covering many of these topics in our premium service The Corporate Bond Investor where we use a lot more data than the normal blogs, in case you want to get into the trenches at some point.
    May 4, 2015. 11:48 AM | Likes Like |Link to Comment
  • Alpha Natural Resources 1 Year Default Probability Drops 4.04% Today To 6.50% [View instapost]
    When the market has the wrong assessment of the firm's future, that would be a good strategy. Not sure that's the case with ANR but we'll see.
    May 3, 2015. 12:54 PM | Likes Like |Link to Comment
  • Eurobank Ergasias 1 Year Default Probability Up 1.00% To 24.25% Today [View instapost]
    Nick many thanks for the kind words. Yes, you are right, we have enterprise risk management software installed in two of the top 4 banks, and, as I mentioned, the risk managers there are top class and doing the best they can to keep the car they are not driving on the road!

    With respect to the two John Campbell articles, keep in mind that he is one of the founders of a $30 billion assets under management firm called Arrowstreet. It's a first class firm and growing rapidly. When you read the papers, you will notice one thing that is very important: all of the standard risk measures for equities implicitly ignore the probability that the firm can default and the stock price could suddenly go to zero. That's a big focus for our team right now.

    Thanks again for the kind words. It's much appreciated.
    May 3, 2015. 02:46 AM | Likes Like |Link to Comment
  • Eurobank Ergasias 1 Year Default Probability Up 1.00% To 24.25% Today [View instapost]
    1774, thanks for the thoughtful question. We provide default probabilities on 36,000 firms in 61 countries, so it's hard to be specific on many of them. In the case of Greece, however, we have major risk management software installations in 2 of the top banks and the staff and their talents are world class. That being said, it's a risky environment and the government's ability and willingness to provide support if needed are issues where your opinion is much more informed than mine. The major issue I would raise in two papers by Prof. John Y. Campbell, former chairman of the economics department at Harvard, with two of his former students Prof. Jens Hilscher at Brandeis (and our senior research fellow) and Jan Szilagyi of Fortress Investment Group. The first paper was published in the Journal of Finance in 2008. The second was published in the Journal of Investment Management. Both papers concluded that high default risk equities under-perform low default risk equities by all common equity risk measures. It's possible that there is "lottery demand" like you see in Las Vegas and in stocks like RIG. That's what I would watch out for. Good luck. We are rooting for our clients and the lovely country of Greece.
    May 2, 2015. 12:37 PM | Likes Like |Link to Comment
  • Wells Fargo & Co.: A 3rd Stage Bond Market Analysis [View article]
    Thanks Hardog. We're just implementing our newest default probability models, which include 500,000 new observations and another 500 corporate failures. Those new default probabilities generally show higher default probabilities at the longer maturities for firms with a high degree of leverage, so the banking industry will look somewhat worse under this updated view of default risk. More of that to follow in coming weeks.
    May 1, 2015. 01:14 PM | Likes Like |Link to Comment
  • A 30-Year View Of The Term Premium And The Outlook For U.S. Treasuries [View article]
    With respect to the formulas one could use for the empirical drift we have tried these specifications with more in the works:
    a. constant
    b. linear
    c. quadratic with no constant term
    d. quadratic with a constant term
    There are lots of others one could try (logs, exponentials) and we have a research paper in the works measuring their accuracy versus the real rates that ultimately came about. That's the hard part as John Cochrane notes.

    "Term premium is possibly negative" means that on average short term Treasuries over N years is expected to be higher than the fixed rate Treasury yield today at that maturity. 10 years ago, no one would have believed that was possible. Now a huge swath of people I know are worried that rates are going lower and that they'll be unable to live on their savings if that happens. That's a rationale for buying fixed rate securities now, because the worst case (lower rates in the future) is really bad for them. Hope this helps.
    May 1, 2015. 10:07 AM | Likes Like |Link to Comment
  • Wells Fargo & Co.: A 3rd Stage Bond Market Analysis [View article]
    Thanks Ernie. Our new default probability model has just been released after 6 years of development and one of the implications is that companies with high leverage, like banks, are almost universally being assigned higher default probabilities than they were before because so many highly leveraged firms failed in the crisis. What that means is that WFC, among others, won't look as good going forward as they do under the current model. More information leads to better analysis, and that's what's happening. Thanks as always for reading.
    May 1, 2015. 01:26 AM | 1 Like Like |Link to Comment
  • Bank Of America Corporation Vs. Deutsche Bank AG: Some Bond Market Insights [View article]
    Yes, I worked for Mack as an intern and he explained that he designed the world's first bank transfer pricing system so it would be clear who was at fault if management made the wrong bet. Book 'em Danno.
    Apr 29, 2015. 10:21 PM | Likes Like |Link to Comment
  • Bank Of America Corporation Vs. Deutsche Bank AG: Some Bond Market Insights [View article]
    It was a sad story all around and McColl enjoyed the process without knowing the value of what was blown up.
    Apr 29, 2015. 12:50 PM | Likes Like |Link to Comment
  • Bank Of America Corporation Vs. Deutsche Bank AG: Some Bond Market Insights [View article]
    Ralph, we are mirror images as I interviewed with Commerzbank in the US but ended up at US banks and investment banks before founding Kamakura Corporation in 1990. Ken Lewis and Hugh McColl destroyed the franchise of BAC-SFO. More than the acquisition per se, the move in the headquarters destroyed a lot of intellectual property.
    Apr 29, 2015. 11:47 AM | Likes Like |Link to Comment
  • Bank Of America Corporation Vs. Deutsche Bank AG: Some Bond Market Insights [View article]
    The ratings were done without examining the collateral on a loan by loan basis, which the agencies have admitted in public, so you cite a good example but draw the wrong conclusions. They did the ratings with no statistical analysis and paid the price.
    Apr 28, 2015. 07:29 PM | 1 Like Like |Link to Comment
  • Bank Of America Corporation Vs. Deutsche Bank AG: Some Bond Market Insights [View article]
    Thanks for the long note. I worked as an intern at Bank of America more than 40 years ago, and, I can assure you, there are a ton of Bank of America stories to tell as well. My firm has no positions to avoid conflict of interest with our clients.
    Apr 28, 2015. 07:28 PM | Likes Like |Link to Comment
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