Re: T-bond holding period

[wfhummel@xxxxxxxxxxxxxx (William F. Hummel)]

On Wed, 8 Oct 1997Doug Henwood wrote:

>William F. Hummel wrote:
>
>>No.  It is the long term investors who determine the long term
>>premium, about which the price will fluctuate in the short run
>>due to the activity of the traders.  Otherwise there would be no
>>basis for the term structure.
>
>How can that be? The long-term holders of the sort you're talking about,
>like life insurance companies and pension funds, will buy probably
>Treasuries no matter what the interest rate. As they say on Wall Street,
>these are the people who are paid to buy bonds. They may move up & down the
>curve a bit, but they're not going to move to another asset category. is
>Met Life going to dump its bond portfolio if it doesn't like the angle of
>Alan Greenspan's eyebrow during Humphrey-Hawkins testimony?

Indeed long term investors will move up and down the curve when
they have new funds or maturing debt to invest.  Since they buy
for yield and not capital appreciation, they will certainly not
buy long no matter what the interest rate.  They will buy at
those maturities that appear to offer the best return for their
own investment horizon.  Sometimes that even means staying in
cash for a while.  This is precisely what gives rise to the term
structure.  Traders, who could care less about yield earnings,
can distort the curve somewhat but they have little influence on
overall structure.

William F. Hummel