Editor’s note: This article is the second in a three-part series[1]. Plain text represents the writing of Greg Foss, while italicized copy represents the writing of Jason Sansone.
In part one of this series[2], I reviewed my history in the credit markets and covered the basics of bonds and bond math in order to provide context for our thesis. The intent was to lay the groundwork for our “Fulcrum Index,” an index which calculates the cumulative value of credit default swap (CDS) insurance contracts on a basket of G20 sovereign nations multiplied by their respective funded and unfunded obligations. This dynamic calculation could form the basis of a current valuation for bitcoin (the “anti-fiat”).
The first part was dry, detailed and academic. Hopefully, there was some interesting information. At the end of the day, though, math is typically not a strong subject for most. And, as for bond math, most people would rather chew glass. Too bad. Bond and credit markets make the capitalist world function. However, when we socialize losses, and reward the risk takers with government funded bailouts, the self-correcting mechanism of capitalism (creative destruction) is jeopardized. This topic is important: Our leaders and children need to understand the implications of credit, how to price credit, and ultimately, the cost of crony-capitalism.
Heretofore, we will continue our discussion of bonds, focusing on the risks inherent to owning them, the mechanics of credit crises, what is meant by contagion and the implications these risks have for individual investors and the credit markets in general. Buckle up.
Bond Risks: An Overview
The main risks inherent to investing in bonds are listed below:
- Price*: rRsk that the interest rates on U.S. treasuries rise, which then increases the yield the market requires on all debt contracts,
