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  The Bond Market Says the Mayans Were Wrong
Posted Under: Markets • Bonds

Well, tomorrow, according to the Maya Calendar, the world will end at 11:11 GMT. This got us thinking. Let's go through two scenarios: the first is that tomorrow will be the end of the world: the second is that tomorrow starts utopia. Then, ask yourself what interest rates would be in those two cases.

If tomorrow was the end of the world, it would be your last chance to spend and no one would care what money was spent on today – lavish travel, food, whatever. As a result, the demand for credit (so people could do anything they wanted) would be infinite. Obviously, the supply of credit would be non-existent because no one would expect to be repaid. As a result, even though no transactions would take place, the interest rate would rise to infinity.

If tomorrow was utopia – and we would want for nothing – no one would care about anything today, credit would be available, but there would be no hurry to borrow, so interest rates would approach zero.

So, with 10-year Treasury yields at 1.79%, it appears that the bond market thinks the Mayans were wrong. The end of the world looks to still be a long way off.
Posted on Thursday, December 20, 2012 @ 2:41 PM • Post Link Share: 
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