Tuesday, June 21, 2016

What is the natural interest rate?

NAME YIELD
GB3:GOV 3 Month 0.24%
GB6:GOV 6 Month 0.37%
GB12:GOV 12 Month 0.53%
 GT2:GOV 2 Year 0.63 0.76%
GT5:GOV 5 Year 1.38 1.20%
GT10:GOV 10 Year 1.63 1.70%
GT30:GOV 30 Year 2.5 2.51%

What about the natural point on the curve?
The knee of the curve is between  2 and 5 year.  We can see that each term before that drops in yield by some fixed percentage.  The first few terms, then. consist of a balanced, three node spanning tree of traders.  When money passes up the curve, the trader charges the transaction costs and some currency risk.

Farther up, after the knee, the number of lenders shrink faster than the number off borrowers, and term risk  is charged.  The is a slewed set of traders, their network is not balanced.

So the natural rate of interest, for Treasuries,  is the 2 year term, really, where term premium comes into play.

What is all the graph stuff?  I am think of traders in  buildings, with node traversal going up and down floors.  That is a Huffman decoder/encoder graph.  The traders are trying to find the typical portfolio, the set of deposits and loans such that the paper work does not bottle neck in its floor traversal.  This is the queuing model of savings and loans, the terms are adjusted, along with rates, the minimize elevator congestion.  All the traders want to be somewhere a third pf the way up the build, trades are optimally balanced and flow is maximum because, like all natural processes, we are packing a sphere, and the static solution is \imprecise, causing motion of traders as they move up and down floor, chasing paper.whihc is mpving up and down floors.

No comments: