Does this mean it would be a good idea to invest in a one month bond if you can wait out the chance the government would be delayed in paying you back?
Imagine we enter an agreement - you'll lend me $100 for a year, and I'll pay you $10 after a year. The banks will pay you $5 to borrow your $100, so you think this is a good deal.
After a year, I pay you back the $100, but I don't have my $10 for interest. I'll pay you back as soon as I can, I swear, seeing myself to the exit. Five years later, true to my word, I give you the $10. So you get your money eventually - is this a good deal?
Well, no, of course not. It may be better than the
bank still, but it's not as good as the deal initially made it appear. You could have taken my $10, given it to a bank for the next five years and - assuming you didn't reinvest interest payments out of a noble desire to make math easier for yours truly - made $0.50 each year, for a total of $2.50. What's more, I could have done that, effectively reducing my debt to you by 25%.
Of course, this isn't on that scale, but that is the risk of delayed payment.
Yes but what hedge funds would do (are undoubtedly doing) is raise a huge amount of money on margin and use it to arbitrage the spread between these and related instruments with other durations. Of course this can go horribly wrong; read the book "When Genius Failed".
Oh god, LTCM. Beware of investors that have no demonstrable controls against automated/HFT pouring of more of my money into a black hole trying to "win" back their losses.
The Trillion Dollar Bet is also a good, high-level documentary.
Imagine we enter an agreement - you'll lend me $100 for a year, and I'll pay you $10 after a year. The banks will pay you $5 to borrow your $100, so you think this is a good deal.
After a year, I pay you back the $100, but I don't have my $10 for interest. I'll pay you back as soon as I can, I swear, seeing myself to the exit. Five years later, true to my word, I give you the $10. So you get your money eventually - is this a good deal?
Well, no, of course not. It may be better than the bank still, but it's not as good as the deal initially made it appear. You could have taken my $10, given it to a bank for the next five years and - assuming you didn't reinvest interest payments out of a noble desire to make math easier for yours truly - made $0.50 each year, for a total of $2.50. What's more, I could have done that, effectively reducing my debt to you by 25%.
Of course, this isn't on that scale, but that is the risk of delayed payment.