Re: moore on term structure

[Warren Mosler <mosler@xxxxxxxx>]

Basil Moore wrote:
>
> Randy
> The conventional story, as i think you know, is there is a positive term
> premium, to reflect the fact that lenders wish to lend short, while
> borrowers wish to borrow long. There were periods in the 19th C when the
> yield curve was negatively sloped, in which case there would be a negative
> term premium.
>
> But this is a fudge to make the empirics come out. It makes the theory near
> tautological, since it can then never be disproved.
> One cannot know the "true ' expectations, and one does not know a priori the
> sign or magnitude of the term premium.

Any term structure can be expressed as a series of, for example, 3 month
rates.
(note the euro dollar contract that goes out 10 years.  It is but an
expression of
10 libor- the libor 'swap' rate.)  So the buyer(s)/seller(s) who are
that
market are expressing their expectations of 3 mos rates whether they
know it or
not.

>
> For all these reasons i am partial to Per's story, that all asset prices
> most importantly depend on expectations of changes in future prices in the
> SR, since LT expectations must be so weakly held.

Not so sure about this bit of logic.  I think it is circular.  If it
were only
speculators, with no 'anchors' or 'limits' due to expectations of the
entire stream
of short term rates, the market wouldn't trade as it does.  There would
be an unstable
equilibrium?  'Weak' LT expectations determine the width of the
'fundamental'
bid/offered spread, but do not imply there are no boundaries composed of
'real'
investors and borrowers at any level?

That being said, I agree with Doug that most 'real' buyers of long
bonds, for example,
are, in the short term,
sensitive to their cash flow that needs to be invested that day, not any
of
what is generally considered fundamentals.  And one large issuer, the
Tsy, of course,
also has no concern for such fundamentals.  So the long market does
become
highly 'technical,' but that doesn't mean there are not underlying
fundamentals at
work on a deeper, long term level.  For example, technicals could push
the yield
on long bonds up to 6.75, 7.00, maybe 7.50, given the current fed funds
rate and
the 'fundamentals',  such as cpi, commodity prices, unemployment rate,
etc.  But
given these, I would say there is a near 0 chance that the long bond
would go to, say,
12% near term, regardless of the technical position.  The implied
forward rates
would be so high as to cause portfolio shifts by 'real' investors and
'real'
borrowers that would limit such a climb in long term rates.  So the
market can
trade in a range before it begins to trigger moves by 'real' players.




 Who could hazard a guess
> on the value of the ST rate 30 or more years out???


Each buyer/seller.


>
>  As you may notice, I don't have any answers!!! Do you??

Yes, but unfortunately they aren't very useful beyond ending
the discussion.

Warren
>
> Alll best  B.
>
> t 02:54 PM 10/7/97 -0600, you wrote:
> >basil
> >why is the term structure almost always positive (LTr>STr)? do mkts
> >almost always expect fed to increase str?
> >randy wray
> >
> >
>
> Basil Moore, Department of Economics
> Wesleyan University
> 685-2363

--
Warren B. Mosler
Director of Economic Analysis
III Finance

See:

"Soft Currency Economics"
"Full Employment AND Price Stability"
=========================
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