So what are TBonds or T-Bills. I was reading an article where the writer has clearly conjured up a doomsday scenario for all those countries trading with America. Since American economy is in shambles, his contention is that China and so does other states must start looking for and explore other markets in order to avoid those tremors that would be felt once America lowers the chunk of its imports from the rest of the world. The other economies as I understood, would not only feel the reverberations but they would come down like a row of falling dominoes… how true is that is yet to be seen.
So what are T-Bills that China has been buying from US and why is that they are considered to be of dubious value.?
Treasury bills and T-bonds are zero-coupon bonds issued by a sovereign government. These are discount instruments which means that they are issued at a discount to face value.
Zero coupon bonds are those that do not pay interest at fixed intervals during their life time, i mean they do not pay interest at fixed intervals. the interest is payable in a bullet fashion i.e. at the end of the period. Discount instruments work like this. A $100 6-month T-bill say is issued at $ 96 and at the end of 6 months, you will receive $100 which is its face value.
I am not too sure if soverign debt like t-bills and t-bonds can be purchased by other governments, they are generally only meant for banks operating in that country.
T-bonds are similar to t-bills albeit they only differ in their tenors. T-bills are issued generally for a period of 1 month, 3 months, 6 months and 1 year; whereas t-bonds are issued for period of 3 years, 5 years and 10 years.
American T-Bills and long term bonds can be bought by anyone just like any other equity. It is basically the government borrowing from the population (hence the desire for California to issue bonds to cover their deficit). Since they are insured by the government, they are generally assumed to be the lowest risk of debt - that is, as long as the government/country exists they will have to honor the debt. Since they are lowest risk instrument, a lot of the other financial models are built off of these (that is they estimate their riskiness relative to these T-Bills/bonds). What this means is a significant change in the value of these T-bills can affect how the market looks at the rest of the equity instruments.
With China and I think Japan buying a lot of these T-bills to soak up the excess dollars they have got in the past so that the value of their currency stays low (and hence prevent imports), over time they have acquired large amounts of US long term debt. In recent years there has been concern that if either country is suddenly forced to drop all this debt (i believe its in the order of half a trillian or more), the US markets would be adversely affected by it.
Khanu and Hmcq: thanks for explaination but having no background in economics, its not really easy to get a grip of what is being explained here (now, don’t bash me for being ignorant)…
Hmcq, China and Japan wali example naheen samajh aai …
having no background in economics, its not really easy to get a grip of what is being explained here (now, don’t bash me for being ignorant)…
)