Debt Markets
Prof. Miles Livingston
University of Florida
Intro-1
Introduction
Empirical Patterns
Intro-2
DEBT AS PERCENT OF GDP
120.00%
U.S. Government Securities
100.00% Municipal Securities
Corporate and Foreign Bonds
Mortgages
80.00%
Consumer Credit
60.00%
40.00%
20.00%
0.00%
Intro-3
Percent
0
4
8
2
6
12
14
18
10
16
1953
1954
1955
1956
1957
1959
1960
1961
1962
1963
1964
1966
1967
1968
1969
1970
1971
1973
1974
1975
1976
1977
1978
1980
1981
Year
1982
1983
1984
1985
1987
1988
1989
1990
1991
Interest Rates Since 1953
1992
1994
1995
1996
1997
1998
1999
2001
2002
2003
2004
2005
2006
2008
Intro-4
10-year
3-month
Interest Rates Since 1931
18.00
16.00
Over 10 Maturity (Historical)
14.00 90 Day T-Bill Auction High (Historical)
12.00
10.00
Percent
8.00
6.00
4.00
2.00
0.00
Jan-31 Jan-39 Jan-47 Jan-55 Jan-63 Jan-71 Jan-79 Jan-87 Jan-95 Jan-03
Year
Intro-5
Interest Rates and the
Business Cycle
Output
Interest rates
Time Intro-6
Efficient Market Hypothesis
Public information is rapidly reflected in security prices.
Driving force: Competition for profits.
Price ($)
Over-adjustment
Efficient Market
Under-adjustment
Time
New Positive Intro-7
Information
Strategies of Borrowers
Borrower’s Best What can
forecast strategy go wrong
High current Borrow short-term, Interest rates may rise
interest rates and roll-over loan and new loan is at
higher interest rates
Low current Borrow long-term, Interest rates may fall
interest rates locking-in the and the opportunity
interest rate to borrow at lower
rates is lost
Intro-8
Strategies of Lenders
Lender’s Best What can
forecast strategy go wrong
High current Lend long-term, Interest rates may rise
interest rates and lock-in high and opportunity to lend
interest rate at higher interest rate
is lost
Low current Lend short-term, Interest rates may fall
interest rates expecting to roll- and the loan must be
over at higher rolled-over at a lower
future interest interest rate
rates
Intro-9