Musings on Markets

MAY 6, 2022

There are three possible explanations for the divergence: Short term versus Long term : The consumer survey extracts an expectation of inflation in the near term, whereas the treasury markets are providing a longer term perspective, since I am using ten-year rates to derive the market-implied inflation.

Risk Premium

Musings on Markets

JANUARY 21, 2023

The premium that investors demand over and above the risk free rate is the equity risk premium , and practitioners in finance have wrestled with how best to estimate that number, since it is not easily observable (unlike the expected return on a bond which manifests as a current market interest rate).

Equity

Musings on Markets

JULY 13, 2022

Country Risk: Equity Risk For equity investors, the price of risk is captured by the equity risk premium, and equity risk premiums will vary across countries. Please do not attach any political significance to my country groupings, or take them personally.

Risk Premium

Musings on Markets

JANUARY 30, 2023

The US treasury market, considered by some still as a safe haven, was anything but safe or a haven, especially at the long maturities, as long term rates soared, with inflation (not the Fed) being the key driver. That is good advice in most years, but 2022 was not one of those years.

Treasury

Musings on Markets

AUGUST 15, 2023

With this investment, you face price risk , since even though you know what you will receive as a coupon or cash flow in future periods, since the present value of these cash flows, will change as rates change. For an investment to be risk free then, it has to meet two conditions.

Risk-free Rate

Musings on Markets

JULY 17, 2023

In my third post at the start of 2023, I looked at US treasuries, the long-touted haven of safety for investors. In 2022, they were in the eye on the storm, with the ten-year US treasury bond depreciating in price by more than 19% during the year, the worst year for US treasury returns in a century.

Marketability

Musings on Markets

JANUARY 27, 2022

While we have increasingly given central banks primacy in discussions of interest rates, it remains my view that markets set rates, and while central banks can nudge market expectations, they cannot alter them.

Risk-free Rate

ThomsonReuters

MAY 6, 2021

Discounted cash flow approaches are also utilized within other functions of an organization, such as treasury, budgeting, financial planning and analysis, and tax planning. For instance, assume a bank is performing a discounted cash flow analysis for a mortgage.

Discounted Cash Flow

Musings on Markets

MAY 24, 2021

Interest rates : To understand the link between expected inflation and interest rates, consider the Fisher equation, where a nominal riskfree interest rate (which is what treasury bond rates) can be broken down into expected inflation and expected real interest rate components. Louis estimates for inflation rates exceeding 2.5%

Treasury

Simply Treasury

AUGUST 2, 2022

The idea is not new to encourage companies to increase their capitalization and reduce their bank debt (partly through more recourse to the capital market - CMU project). The rate would be calculated based on a 10-year "risk-free interest" rate depending on the currency, increased by a 1% risk premium (1.5%

Equity

Musings on Markets

JANUARY 9, 2021

The second is that there are great (and free) sources for macro economic data, ranging from the Federal Reserve (FRED) to the World Bank and I don’t see the point of replicating something that they already do well. Micro Data The focus of my data collection is understanding how companies are operating and how investors are pricing them.

Risk Premium

Musings on Markets

JANUARY 27, 2021

In my last post , I described the wild ride that the price of risk took in 2020, with equity risk premiums and default spreads initially sky rocketing, as the virus led to global economic shutdowns, and then just as abruptly dropping back to pre-crisis levels over the course of the year. against developed market currencies.

Start-ups

Musings on Markets

JANUARY 19, 2022

In a post at the start of 2021 , I argued that while stocks entered the year at elevated levels, especially on historic metrics (such as PE ratios), they were priced to deliver reasonable returns, relative to very low risk free rates (with the treasury bond rate at 0.93% at the start of 2021).

Risk Premium

Musings on Markets

JULY 1, 2022

The first is the return that can be earned on guaranteed investments , i.e., US treasury bills and bonds, for instance, if you are a investor in US dollar, since it is a measure of what someone who takes no or very low risk can expect to earn. That pullback has had its consequences, with equity risk premiums rising around the world.

Marketability

Musings on Markets

MARCH 19, 2022

The overriding message in all of this data is that Russia/Ukraine war has unleashed fears in the bond market, and once unleashed that fear has pushed up worries about default and default risk premia across the board.

Start-ups

Musings on Markets

JULY 25, 2023

Investors in Saudi Arabia are still exposed to significant risks from political upheaval or unrest, and may prefer a more comprehensive measure of country risk. For three decades, I have wrestled with measuring this additional risk exposure and converting that measurement into an equity risk premium, but it remains a work in progress.

Risk Premium

Musings on Markets

MARCH 25, 2021

The first has been the steep rise in treasury rates in the last twelve weeks, as investors reassess expected economic growth over the rest of the year and worry about inflation. The Stocks Story As treasury rates have risen in 2021, equity markets have been surprisingly resilient, with stocks up during the first three months.

Equity

Musings on Markets

JULY 24, 2024

After the 2008 market crisis, I resolved that I would be far more organized in my assessments and updating of equity risk premiums, in the United States and abroad, as I looked at the damage that can be inflicted on intrinsic value by significant shifts in risk premiums, i.e., my definition of a crisis.

Risk Premium

Musings on Markets

JANUARY 28, 2025

It was an interesting year for interest rates in the United States, one in which we got more evidence on the limited power that central banks have to alter the trajectory of market interest rates. In this post, I will begin by looking at movements in treasury rates, across maturities, during 2024, and the resultant shifts in yield curves.

Banking

Musings on Markets

MAY 3, 2025

As equities careened through April 2025 between panic and delirium, the other asset classes were surprisingly staid, at least on the surface, starting with the US treasuries.

Marketability

Equidam

APRIL 22, 2025

10] , [23] , [2] Discount Rate: The rate used to discount future cash flows is typically the cost of equity, calculated via the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium. [23] 23] Risk-Free Rate: Tied to government bond yields (e.g.,

Discounted Cash Flow

Musings on Markets

FEBRUARY 6, 2025

Thus, if the US treasury bond rate (4.5%) is the riskfree rate in US dollars, and the expected inflation rates in US dollars and Brazilian reals are 2.5% Thus, if the US treasury bond rate (4.5%) is the riskfree rate in US dollars, and the expected inflation rates in US dollars and Brazilian reals are 2.5%

Risk Premium