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  • Will We See Inflation or Deflation? [View article]
    Your assumption of credit risk is incomplete. Anyone who relies on earning from the spread between short term borrowing and long term lending is at risk for changes in short term lending rates once the long term rates are locked in.

    If foreigners holding US debt start selling in earnest, short term rates here might rise above their locked in current long term rates.

    I'm not saying that's going to happen, but it is possible and therefore a credit risk. If they have bought GSE bonds at 5% and short term rates rise to 6% or higher they will start bleeding money at a time when the value of their GSE debt has dropped below what they paid for it.
    Dec 04 10:48 am |Rating: 0 -1 |Link to Comment
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