Home Economics Insanely Ignorant People - American Prospect Edition

Insanely Ignorant People – American Prospect Edition

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There are times when it’s difficult to believe the plain, simple, ignorance of people attempting to comment upon the passing scene. Today’s example is David Dayen at The American Prospect. He comes across a Twitter thread from a group called Americans for Financial Reform. The usual three teenagers in the basement with a mimeograph machine. Well, given their knowledge we’d better hope that’s what they are:

A certain confusion there about what par value means. For those confused, a primer:

What Is Par Value?
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit status.

Market value and par value are not the same thing. As an example, the par value on an Apple share is $0.000015 and the market value is $109.00 or so. -ish, you understand. If the Federal Reserve were to go out and buy an Apple share then it would be paying $109.00 – ish, not some fraction of a penny.

Yes, bonds are different but not that different. Interest rates were higher when many/most bonds were issued at $100 par value. So, when interest rates fall they go up in value. To, say, $107. Which is the market price at which the Fed buys them.

At which point David Dayen, that executive editor of The American Prospect, the source essential for teenage mimeograph owners attempting to understand the world:

Americans for Financial Reform ferreted this out in a criminally under-discussed revelation. The Fed reports its corporate bond purchases and loans under the CARES Act to Congress; the most recent one came out September 8. If you go to the trade-level data for bond purchases, you see this very clearly. There’s a par value, a market rate for the bond purchases the Fed is making. It’s paying more than par with virtually every purchase. It bought Altria (the Marlboro and Juul people) bonds at 109.9 percent. It bought Columbia Pipeline group at 116.7 percent. It bought Principal Financial Group at 112 percent. All but a very few of hundreds of purchases totaling tens of billions of dollars are made above par. On average, the price is 107 percent.

Nope, he’s not got the slightest clue either, has he. Even after I alerted him yesterday to this point via Twitter.

And note – Dayen is one of those trying to explain the world to the teenagers with the mimeograph machines. No wonder they’re all entirely at sea, crazed even, on any subject economic. It’s not that they just have a slightly different view of the world, judge by different standards, it’s that they’re gaining their information from the ignorant. Seriously, they don’t make buses short enough to carry those with this level of financial market understanding.

Just questions to make heads explode. If bonds always trade at par value then why do we have a market in them? A market in which we track their prices? Even, a market in which we note that prices do change?

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6 COMMENTS

  1. The FED paying prices at above par value, consistent with a climate of low interest rates, which according to Expunct is OK, and according to ” The American Prospect” is not OK., because it serves to line the pockets of Wall Street.
    With neither Expunct or The American Prospect detailing what the market rate should be, in the absence of the FED’s intervention, neither argument has value.
    It’s perfectly possible to accept that the FED is buying too far above Par Value, ie the FED could only be paying prices at an average of 105% above par, but is closing at 107% above par, which would be a straight QE gift of 2% to Wall Street, and therefore the FED is actually lining the pockets of Wall Street at the expense of the Main Street.
    As a separate thought experiment, some private investors own some of these bonds, and maybe had they been offered they would have accepted 105% above par, but the FED never offered to buy them out, only the banks were allowed to sell to the FED.

  2. People not knowing that “Par Value” and “market value” are different: pardonable ignorance.
    “thefat tomato” claiming that Expunct argument has no value because it merely points out that “Par” is not the same as “market value” without listing every single market price for every stock bought by the Fed – not pardonable because it is blatantly false.

    • If either Expunct or The American Prospect articles listed the FED purchase price vs the bond market price I missed that.
      It appears to me that over the last three years Altria bonds traded at prices above par value, Principal Financial Group bonds traded at prices below par.
      Happy to accept that “The American Prospect” article is a straw man, but I still don’t understand why the “Expunct” counter argument which addresses that straw man argument is not also lacking.

      • It doesn’t need to list the purchase price any more than it needs to quote the different wavelengths to support a comment that red is a different colour to green: in fact, far less so since red and green are both colours on the visible spectrum whereas par value and market price are different concepts and rarely coincide. What you missed was the point, made by Expunct, that the reason the American Prospect article was either culpably negligent or deliberately misleading was its assertion that par value was the “market rate”, not just its failure to compare the purchase price with the market price.
        “*There’s a par value, a market rate for the bond purchases the Fed is making.*”

        • Sure, The American Prospect article confuses the par value and market price, as quoted in the statement above, which insinuates that the par value/face value/denomination value/cash on maturity value should equal the market price.
          I agree with yourself and Expunct, that that insinuation, that par/face/cash on maturity value must equal market value/price, is not valid, presumably because of risk&coupons&supplyndemand between now and maturity also need to be factored in.
          So let me re-phrase;
          I am OK with the FED paying the market price, paying the par value, paying above the market price, paying above the par value.
          Suppose bond A#B#C# INC. has a bond market price of $90 with a par/face/cash on maturity value of $100, and the FED buys at 107% over par ie $107, is the FED giving 17$ to the bondholder in that purchase?
          I would say that yes, the FED just gave the bondholders 17$, $10 difference between the market price and par value, plus the 7%/7$ premium over the par value. Or is that not correct?

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expunct

in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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