> Bonds are a commited fixed return, which means the value of bond goes up if the going rate for new bonds goes down.
> Thus bonds can be much more profitable than stocks when the marketing is going down. The central bank will drop rates, and thus any holder of existing bonds gets to sell their old bonds for more, maybe much more.
> Of course this is not the big driver for bond demand. Rather bonds are demanded by money managers who are not allowed to take any risk. Think banks, and especially central banks.
> Said money managers want to never-ever lose so much as a dollar of principle. They are not paid to maximize total return, but rather to manage this pile of money in such a way to never let it shrink.
> You'll see this set of incentives all over the world if you know where to look: money which is not expected to be invested.
> Think of mega-corp's payroll. Every month they need to pay X large number of dollars by the end of the month. Missing payroll by 1% would be such an incredible disaster it would lead to lawsuits. So big-corp does the sensible thing, and keeps the money in a money-market fund. Said money-market fund in-turn holds various short-term bonds (1 year or less).
> Who borrows money for only 1 year or less? People who have a little bit of their own money with which to take risk and want to turn around and borrow longer term.
> Bit by bit money which needs to be 100% safe, gets lent its way up the value chain until you reach end users.
> My favorite example of this is how the large Japanese REITs finance themselves. These REITs will have a relationship with a single major bank. One might expect that since they have a special relationship said bank will provide all financing: but they do not. Instead the REIT borrows floating-rate loans from 10+ banks, including their special bank. Then the REIT turns around and offers these loans to the special relationship bank. Said special bank takes the 10+ float rate loans and provides the REIT a single (let same size) 30year fixed rate loan.
> In this way everyone gets what they want. The REIT gets to tell investors their loans are not due for refinance until 2050. All the banks get to lend out money at 0.5% interest, and the special bank gets to take the other bank's money and earn an extra 0.5% interest on top of it all in exchange for taking the interest rate risk.
> So if you are wondering why bonds are weird: it is because you are not the customer.
I believe your talking about a participation loan. These are very common in the US as well because some financials are capped at how much they can lend so they participate with other financials who maybe can't hedge the whole risk but may want a piece of it. The lead institution benefits because they don't need to lend a sizeable chunk of their cap and they get to build that relationship.
Please don't quote an entire post, you're just adding noise. We can already see which post you are replying to. Quoting is for replying to a specific excerpt.
> Thus bonds can be much more profitable than stocks when the marketing is going down. The central bank will drop rates, and thus any holder of existing bonds gets to sell their old bonds for more, maybe much more.
> Of course this is not the big driver for bond demand. Rather bonds are demanded by money managers who are not allowed to take any risk. Think banks, and especially central banks.
> Said money managers want to never-ever lose so much as a dollar of principle. They are not paid to maximize total return, but rather to manage this pile of money in such a way to never let it shrink.
> You'll see this set of incentives all over the world if you know where to look: money which is not expected to be invested.
> Think of mega-corp's payroll. Every month they need to pay X large number of dollars by the end of the month. Missing payroll by 1% would be such an incredible disaster it would lead to lawsuits. So big-corp does the sensible thing, and keeps the money in a money-market fund. Said money-market fund in-turn holds various short-term bonds (1 year or less).
> Who borrows money for only 1 year or less? People who have a little bit of their own money with which to take risk and want to turn around and borrow longer term.
> Bit by bit money which needs to be 100% safe, gets lent its way up the value chain until you reach end users.
> My favorite example of this is how the large Japanese REITs finance themselves. These REITs will have a relationship with a single major bank. One might expect that since they have a special relationship said bank will provide all financing: but they do not. Instead the REIT borrows floating-rate loans from 10+ banks, including their special bank. Then the REIT turns around and offers these loans to the special relationship bank. Said special bank takes the 10+ float rate loans and provides the REIT a single (let same size) 30year fixed rate loan.
> In this way everyone gets what they want. The REIT gets to tell investors their loans are not due for refinance until 2050. All the banks get to lend out money at 0.5% interest, and the special bank gets to take the other bank's money and earn an extra 0.5% interest on top of it all in exchange for taking the interest rate risk.
> So if you are wondering why bonds are weird: it is because you are not the customer.
I believe your talking about a participation loan. These are very common in the US as well because some financials are capped at how much they can lend so they participate with other financials who maybe can't hedge the whole risk but may want a piece of it. The lead institution benefits because they don't need to lend a sizeable chunk of their cap and they get to build that relationship.