Minyan Mailbag: Telecom Italia Bonds
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.
Prof. Succo -
Would you or one of the professors comment on the thinking that goes behind purchasing a 50 year bond at such a low rate? Evidently some smart (and dumb) people think this is a good idea. What would the world economy look like for this to be a smart move?
Minyan Dr. Jim Wood
Almost certainly retail would not buy bonds such as these, at least not directly. The primary buyers would be insurance companies and pension funds who have duration matching requirements. Remember, everything is relative to them, which is the definition of asset-liability matching.
Now that I have said that, we all know that because of past mismatching of asset-liability streams due to unrealistic risk/return assumptions(primarily as a result of Wall Street consulting), insurance companies and pension funds have dramatically increased their exposure to more risky assets.
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