by Dave Kranzler, Investment Research Dynamics:
I saw a thought-provoking retweet on Mark Yusko’s twitter feed and I wanted to clarify the idea conveyed: “When bonds yields nothing, they aren’t much different than currencies.”
This comment is somewhat misleading because bonds are indeed a derivative of currencies. It’s basic financial economics that Mark Yusko learned in the same Robert Leftwich finance course at U of Chicago that I took.
The tweet references sovereign-issued bonds. Sovereign bonds are simply a sovereign’s currency issued to investors who are willing to bear the “time value” risk connected to the sovereign, where “time value risk” is the sum of “credit risk” – the risk of getting repaid – and “opportunity cost” – the foregone cost of spending that capital now or investing it in an alternative asset that might yield more.