# And among the acolytes

Marco Fante says:
September 16 2017 at 1:03 am
The commenters here that have cited formulaic, CAPM type explanations for the aberration in bond prices would appear to have been paying insufficient attention to the relevant chart.

There is no surprise in the fact that there is a gap between the nominal and market value of Govt. debt, and the standard explanation for that applies quite neatly to the period before 2009 where the gap between the two values is relatively narrow, steady, consistent and (as formulae would have it) predictable.

What the standard explanations obviously do not account for is the sudden, erratic and increasing gap that has appeared since 2009. I’m quite shocked by the chart actually. I had no idea that divergance had become so extreme. It has a lot to do with the value people place on security of course. The ‘risk-free rate’ has become effectively negative. More so than I imagined.

Richard Murphy says:
September 16 2017 at 8:24 am
Thank you

A rational comment

What does S. Fante think will happen to bonds in issuance when interest rates fall?

## 11 thoughts on “And among the acolytes”

1. If Murphy and his acolytes think the rest of the world has bond valuation all wrong, they should put their money where their mouth is. This time next year, they’ll all be millionaires!

Torstton Willam says:
September 16 2017 at 8:54 am

Try my excel formula above:
=NPV(0.005,5,5,5,5,5,5,5,5,5,105) where the interest rate was assumed to be 0.5% which produced a market/present value of £143.79

Now, switch the interest rate to 4% and we have
=NPV(0.04,5,5,5,5,5,5,5,5,5,105) which gives you a market/ present value of £108.11

Pretty standard stuff, really…

Richard Murphy says:
September 16 2017 at 10:20 am

I agree

And so misunderstood

So under cover of a reply, Spud contrives a handbrake turn.

Smooth.

3. So under cover of a reply, Spud contrives a handbrake turn.

I’m assuming he just didn’t understand what you said and thought you were sharing the tin foil hat.

4. I hope Murphy has factored in the cost of long term care for himslef in all his NPV computations about his future income and pensions and costs etc.

Judging by the increasingly deranged output he’s pretty close to being sectioned and the sale of the unimpressive end terrace in Ely to help to fund someone to wipe his bottom daily surely can’t be too far off.

I wonder if he has appointed anyone under a power of attorney to deal with his affairs now that he has split from the wife?

5. So Mr Fante has heard of CAPM. It’s a pity he does not understand that a risk free rate of return is assumed to be available and that it tells you how to value risky assets

6. @Diogenes. And CAPMs requirements for a full set of investible assets which appears quite hard to get. Doesn’t stop people coming up with an efficient frontier stuff to use in investment allocation though. I have something I am supposed to be reading on that but can never find the time.

7. Andrew, isn’t CAPM more or less busted as a theory because empirical backing for it cannot easily be found, eg share valuations are not a function of their betas in the vast majority of cases. Eg a portfolio of low beta shares will often outperform high beta shares

8. In many ways CAPM for financial markets is like perfect competition for economists; a useful simplifying framework for analysis and modelling but of very limited use in practise.

9. One doesn’t need to subscribe to CAPM or perfect competition to understand that bond math is what it is (although CAPM helps make it more understandable). Arbitrage arguments and existence of a risk-free asset will suffice. For which reason it would be entertaining for Prof. Murphy or a suitable True Believer to spend some time on on a bond trading desk. (Not so amusing for any firm loony enough to permit it).