Actually, this is even better from the Senior Lecturer

So, Ritchie’s misunderstandings about market, par, nominal, values of gilts come from this bloke:

If you look at his source it’s Bank for International Settlements (aka, central bankers’ central bank). Which discusses this particular database here.

Measuring valuation effects

Uniquely, the new BIS data set tracks the evolution of government core debt at nominal and market value.

Market value is the amount for which a creditor could exchange assets or settle a liability at any moment in time. In particular, changes in the market value of debt affect the financial position of investors that mark their portfolios to market or monitor market values in order to assess potential gains or losses. Market values may fluctuate significantly because of changes in risk-free interest rates, but also in credit and other risk premia.

In contrast, the nominal value of a debt instrument, ie “the amount that at any moment in time the debtor owes to the creditor” (Handbook on Securities Statistics; see BIS-ECB-IMF (2015)), is stable from the moment of issuance till full repayment (except when accrued interest has not yet been paid; see below). The difference between the market and nominal value of a security reflects changes in yields since issuance.

There simply is no mystery at all and it’s explained at the original source.

It’s also sod all to do with uncertainty or even risk. It’s falling interest rates and that’s all.

5 thoughts on “Actually, this is even better from the Senior Lecturer”

  1. Dr. Keith Crainshraw says:
    September 17 2017 at 11:04 am
    Clearly Upsetting Neoliberal Trolls!

    Reply
    Richard Murphy says:
    September 17 2017 at 11:56 am
    I seem to be

    Nice to see you agree Richard, you really are a C.U.N.T.

  2. Worstall said:
    “It’s also sod all to do with uncertainty or even risk. It’s falling interest rates and that’s all.”

    You know that, I know that, so do the rest of us on here.
    It’s just the ‘Sage of Ely’ and his sycophants (or should that be Si Cofants!) that struggling with the concept!

  3. I like the graphs in the BIS linked article, especially the one with the graphs showing market to nominal values of debt.
    Only one country has a market value below the nominal. ( Greece )
    I wonder if Ritchie believes in the corollary that their debts are/might be seriously undervalued.

  4. Murphy fails on two levels:

    1. He doesn’t understand bond valuation models and their relationship to yield curves.

    2. He doesn’t understand that there is no “right price”. The market simply operates on the buying and selling of bonds at whetver price the market offers. From current bond prices traders will calculate implied yield curves or zero coupon yield curves. Using discount rates implied by those yield curves, traders will value every bond in the market and if any bonds look overpriced or underpriced (comparing their offered price in the the market to with the valuation), the bond will be sold or bought as appropriate. Traders don’t know or care whether the market is applying the “correct” discount rate. All they do know is the discount rate that the market requires at any time for there to be an equal volume of buyers as sellers.

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