Friday, September 21, 2012

Zero yield does not equal zero volatility

Zero yields do not equal zero volatility. This may have been forgotten by investors as they move out on the yield curve. There is no safety at low rates and with a zero bound on nominal rates, there a more positive skew with rate increases. there is no doubt that like Japan US rates can stay low for extended periods, but the risk is still present. As coupon rates, decrease bond durations increase. This is a mathematical fact.

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