Jul

13

I believe the 10/30 year bond market right now price in no principal default, possibly a few late interest payments and no major deficit reduction plan. If they reach some type of real deficit reduction plan (unlikely), then 10 and 30 year rally. The real bear scenario would be if there were actual principal defaults. But this is also unlikely to happen. They raise the debt limit on August 4th and all go on summer vacation.

Regarding all the models, CAPM, EFT, Black Scholes and others depend on a risk free rate but substituting a nearly risk free is probably good enough. They are all just models and even Fama admits the EFT has too many exception to really work. The IRR and NPV that companies uses for capital projects usually use a cost of capital or corporate bond rate.

I think politicians are definitely watching the market and not the other way around, and no real deficit change will occur until 10/30 year yields are much higher. It is just to cheap and easy to keep running deficits for now. The bond market will drive the policy and for now rates are amazingly sanguine.


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