The End of the Risk-Free Rate: Investing When Structural Forces Change Government Debt
Wednesday, August 14th, 2013
Chair: Henry To, CFA
A CFALA Book Club Event
The End of The Risk Free Rate discusses how to look at the investing world in a different way. The "risk free rate" is a feature of a fiat currency system where a reference or benchmark is used to value financial assets.
The 2008 financial crisis and subsequent European sovereign crisis of 2010-2012 has shown what was once assumed to be a stable investment like a T-bill or government bond has become a volatile instrument with credit characteristics. This may have changed the way risk premiums should be evaluated.
When looking at the risk free rate, it has components that were not thought of prior to the 2008 crisis. Restructuring, social-political developments, private sector involvement, financial repression, and interest rate volatility are elements of a "new risk free rate." Investors should be aware of these elements when evaluating corporate, municipal, mortgage backed, high yield bonds as well as equities. The risk premium earned is perhaps at a different level and this book shows with practical examples and quantification.
Another implication is there are no "alternative" risk free rates. Often said that as government bonds are less appealing due to low returns, there are alternatives like corporate bonds or emerging market sovereign debt perceived to be "safer." This book demonstrates with extensive analysis that is not the case and how investors should use this information when judging investments.
The End of the Risk Free Rate does not mean the end of investing in bonds. The book makes neither the case that bonds are no longer suitable investments. On the contrary, The End of the Risk Free Rate provides a framework and practical analysis investors can arm themselves with to better understand the complexity of the investment universe that is functioning no longer on the premise of something that is "risk free."
Ben Emons is a senior vice president and a portfolio manager in the global portfolio management group at Pacific Investment Management Company (PIMCO), Newport Beach, California. Prior to joining PIMCO in 2008, he was a portfolio manager at Nuveen Investments in Los Angeles, focusing on government bonds and derivatives. He has 18 years of investment experience and holds an MBA from the University of Southern California Marshall School of Business and a master's degree in international finance from the University of Amsterdam.
As a participant in the CFA Institute Approved-Provider Program, the
CFA Society of Los Angeles has determined that this program qualifies
for 1 credit hours. If you are a CFA Institute member, CE credit for
your participation in this program will be automatically recorded in your CE Diary.
Time: 5:30 PM- 7:00 PM, Cocktail Reception with appetizers and presentation
Location: Omni Los Angeles
251 South Olive Street
Los Angeles, CA 90071
For directions call hotel: (213) 617-3300
Event parking at the Omni $12.00
Dress Code: Business Casual
Methods of payment accepted: Visa/Mastercard, American Express and Discover. If you prefer to pay by check please register online and select "purchase order" as your payment option and enter your last name as the purchase order number. Mail check to: CFA Society of Los Angeles, 520 S. Grand Ave, Suite 370, Los Angeles CA 90071.
*Credit card payments will only be accepted through the secure online registration, and not by phone or email.