Poll: Global Bond Market

[David]

Do you want a Global Bond Market to be added to the game?

For gameplay balance reasons, we will need to keep the yields from bonds in the global bond market to a minimum, otherwise it will seriously undermine gameplay challenge.

There are two approaches to implement it. Please vote which one you like.

[colonel_truman]

Why only one option?

[standardplayer]

Option 3:
Global Bond Market: Money Market that includes Short Term Treasury Bills and Commercial Paper, and Bond Market including Government, Mortgage, and Corporate Bonds

Market Size: $10+ Trillion (Sufficiently Large So that it would be very difficult to own any Substantial Portion of Market e.g. $100 Billion = ~1% of Market)

Market Distribution:
-Government Debt ~35%
-Corporate Debt ~25%
-Mortgage/Asset Backed Debt ~25%
-Agency Debt: ~10%
-Money Market ~5%

Yields:
-Lowest: Short Term Bills and Commercial Paper (About Equal to or small premium or discount to Savings Account Interest)
-Low: Government and Agency Bonds (Slightly Higher than Short Term Bills and Commercial Paper)
-Mid: Corporate and Mortgage/Asset Backed Bonds (Slightly Higher than Government Bonds)
-High: Mortgage, Consumer, and Commercial Loans (Premium to Corporate Bonds)

*Investment Grade Government Bond Market:
-US Government Debt: US Treasury Bills (6 Months), US Treasury Notes (5-10 Year Bonds), US Agency Bonds (5-10 Year Bonds)
-Developed Nation Bonds (Europe: UK, Germany): Euro Bills (6 Months), Euro Notes (5-10 Year Bonds)
-National Government Bonds (for your Nation): Nation Bills (6 Months), Nation Notes (5-10 Year Bonds)

*Investment Grade Corporate Bonds:
-Corporate Bonds Issued by Global Stock Market Companies: Commercial Paper (6 Months), Corporate Bonds (5-10 Year Bonds)
-Percentage of Investment Grade Market By Credit Ratings from AAA to BBB: AAA = 1.5%, AA = 8.5%, A = 33.5%, BBB = 56.5%

*Investment Grade Mortgage/Asset Backed Bonds: Mortgage/Asset Backed Bonds (5-10 Year Bonds)

See Wikipedia for Bond Market: https://en.wikipedia.org/wiki/Bond_market

See Corporate Bonds by Credit Rating:
https://www.spglobal.com/en/research-in ... ay-in-2019

Side Note Global Stock Market Should also be Substantial Minimum of ~$2.5-$5+ Trillion Preferably $10+ Trillion

[standardplayer]

I don't have the Early Access to Banking DLC but, you may want to do more research on how interest rates work in the game based on some of the pictures I have seen in the Bank DLC Features. The Interest Rate on Savings/CD Accounts Seem way too high.

Savings Account Rate is 7% in one Picture i saw. When it should be more like ~3.75% Based on my Estimates below.

Yields/Rate Research (Based on FRED Data):

• Federal Funds Rate:
o Historical Average/Median Rate: ~4.5%
o Standard Deviation: ~3.5%
o Historical Range: ~1%-8%
o Current Rate: ~1.5%

• 10 Year US Treasury:
o Historical Average/Median Rate: ~5.75%
o Standard Deviation: ~3%
o Historical Range: ~2.75%-8.75%
o Current Rate: ~1.5%

• 20 Year BBB Bond:
o Historical Average/Median Rate: ~7%
o Standard Deviation: ~2.5%
o Historical Range: ~4.5%-9.5%
o Current Rate: ~3.6%

• Bank Prime Rate:
o Historical Average/Median Rate: ~6%
o Standard Deviation: ~2.5%
o Historical Range: ~3.5%-8.5%
o Current Rate: ~4.75%

• 30 Year Mortgage:
o Historical Average/Median Rate: ~7.5%
o Standard Deviation: ~3.25%
o Historical Range: ~4.25-10.75%
o Current Rate: ~3.5%

• Bank Net Interest Margin:
o Historical Average/Median Rate: ~3.75%
o Standard Deviation: ~0.5%
o Historical Range: ~3.25-4.25%
o Current Rate: ~3.25%

• Estimated Bank Savings/CD Account Rate:
o Historical Average/Median Rate: 7.5%-3.75% = 3.75%
o High: 10.75%-3.75% = 7%
o Low: 4.25%-3.75% = 0.5%
o Historical Range: ~0.5-7%
o Current Rate: ~3.25%

Source: https://fred.stlouisfed.org/

[avengerbg]

From my observation, savings and all other deposit rates depends from the inflation, the maximum rate is always 1% less then inflation, so with high enough inflation, you can have very high saving and deposit rates.

[standardplayer]

From my observation, savings and all other deposit rates depends from the inflation, the maximum rate is always 1% less then inflation, so with high enough inflation, you can have very high saving and deposit rates.

Inflation definitely drives interest and savings rates I was just looking at historical averages and ranges. Not sure about it is always 1% below.

• Inflation Rate:
o Historical Average/Median Rate: ~2.0%
o Standard Deviation: ~0.5%
o Historical Range: ~1.5%-2.5%
o Current Rate: ~1.6% (Feb 2020)

[David]

You can modify the interest rate with these settings:

Web page with details:
https://www.capitalismlab.com/banking-d ... -settings/

Base Loan Interest Rate
This modifies the base interest rate which affects bonds and bank loans. A higher interest rate increases borrowing costs, posing greater challenges for companies that take on debt to expand.

Initial Net Interest Spread
Net interest spread refers to the difference in the rate at which a bank takes deposits from customers, and the rate at which it offers loans. A larger net interest spread means a greater profit margin for a bank.

[David]

*Investment Grade Government Bond Market:
-US Government Debt: US Treasury Bills (6 Months), US Treasury Notes (5-10 Year Bonds), US Agency Bonds (5-10 Year Bonds)
-Developed Nation Bonds (Europe: UK, Germany): Euro Bills (6 Months), Euro Notes (5-10 Year Bonds)
-National Government Bonds (for your Nation): Nation Bills (6 Months), Nation Notes (5-10 Year Bonds)

Hi standardplayer, thanks for your input.

With the way the poll is trending, it is very likely that we will implement the first option: "Yes, I would like to see a massive amount of bonds issued by governments around the world that you can buy for minimal yields"

We will add a new tab on the Bond Market screen:
[Corporate Bonds] [Municipal Bonds] [Sovereign Bonds]

The Sovereign Bonds that we plan to add to the game would be:

US Treasury Notes, which are issued in terms of 2, 3, 5, 7, and 10 years.
(https://www.treasurydirect.gov/indiv/pr ... glance.htm)

What would you suggest for the size of the US Treasury Notes in each issuance? How about $1 billion x accumulated inflation rate to start with?

-Developed Nation Bonds (Europe: UK, Germany): Euro Bills (6 Months), Euro Notes (5-10 Year Bonds)

It is in a different currency (Euro). The game currently does not handle multiple currencies. So we will only implement US Treasury Notes.

-National Government Bonds (for your Nation): Nation Bills (6 Months), Nation Notes (5-10 Year Bonds)

It is a good idea too. But currently the National government does not have a balance sheet. Maybe it is something for the future if there are enough solid ideas for a Nation DLC.

[standardplayer]

*Investment Grade Government Bond Market:
-US Government Debt: US Treasury Bills (6 Months), US Treasury Notes (5-10 Year Bonds), US Agency Bonds (5-10 Year Bonds)
-Developed Nation Bonds (Europe: UK, Germany): Euro Bills (6 Months), Euro Notes (5-10 Year Bonds)
-National Government Bonds (for your Nation): Nation Bills (6 Months), Nation Notes (5-10 Year Bonds)

Hi standardplayer, thanks for your input.

With the way the poll is trending, it is very likely that we will implement the first option: "Yes, I would like to see a massive amount of bonds issued by governments around the world that you can buy for minimal yields"

We will add a new tab on the Bond Market screen:
[Corporate Bonds] [Municipal Bonds] [Sovereign Bonds]

The Sovereign Bonds that we plan to add to the game would be:

US Treasury Notes, which are issued in terms of 2, 3, 5, 7, and 10 years.
(https://www.treasurydirect.gov/indiv/pr ... glance.htm)

What would you suggest for the size of the US Treasury Notes in each issuance? How about $1 billion x accumulated inflation rate to start with?

-Developed Nation Bonds (Europe: UK, Germany): Euro Bills (6 Months), Euro Notes (5-10 Year Bonds)

It is in a different currency (Euro). The game currently does not handle multiple currencies. So we will only implement US Treasury Notes.

-National Government Bonds (for your Nation): Nation Bills (6 Months), Nation Notes (5-10 Year Bonds)

It is a good idea too. But currently the National government does not have a balance sheet. Maybe it is something for the future if there are enough solid ideas for a Nation DLC.

Just throwing out a lot of my raw ideas. I can understand from the perspective of your limited development resources it would not make sense for you to implement what I described in great detail above but maybe a simpler version could be done that included global corporate bonds. The Euro Bonds was just a rough idea to add a variety of options. The National Bonds section was for the Nation Sim DLC definitely something to consider later if that idea gets interest just not right now.

(The way you asked the poll question where you can only choose one option instead of multiple does not give you a good indication of what people would be interested in.)

Simplified Version:
-Treasury Notes (Sovereign)

-Money Market (Treasury Bills and Possibly Commercial Paper): Could be actual Securities or through an intermediary Money Market Fund (like Vanguard Federal Money Market Fund https://investor.vanguard.com/mutual-fu ... file/VMFXX)

-Global Corporate Bonds linked to Global Stock Market: Each Global Company would have a Percentage of the Companies Book Value Issued as Bonds each year


Issuance Size would depends on the year you start in, the frequency of issuance, and distribution of maturities. I think It might be better to simplify the Distribution of Maturities to just 5 and 10 Years for implementation purposes. Issuance's could be done quarterly, Semiannually or Yearly. US Debt has not grown at inflation rate it has grown at average of 6%-7% (3+ Times Inflation) per year since 1990. You would need enough in each issuance to refund old debt and grow the total debt by a certain amount each year.

The goal being that a single individual or organization would not be able to own the majority of the market. (US Debt was ~$3+ Trillion in 1990 and ~$22+ Trillion in 2020.) It is important for the market to be sufficiently large so that a wide variety of individuals and organizations could invest. It would be especially important for Financial institutions to invest in because Insurance companies should invest 70%-80% of their assets in them and banks should invest a portion of their assets in liquid bonds to earn a return but have a investment portfolio with a liquid market outside loans to cover potential deposit outflows.

See Inputs Needed Insurance Companies: http://www.capitalism2.com/forum/viewto ... =52&t=5751

After further Research I determined that it might be useful to restrict the amount of stocks to a smaller portion of capital say No more than 20%-30% of Assets.

"What Insurance Companies Invest In

Insurance companies could invest in the stock market, and in fact they do, but investing in the stock market alone would be too risky because it's a cyclical market that swings from high bull market returns to considerable bear market losses. An insurance company has to know with a high degree of certainty that overall in any given year they're not going to absorb an unsustainable loss; therefore stocks can only represent a relatively small portion of their investment portfolios. For life insurance companies, stock market investments represent around 5 percent of total holdings. Property and casualty insurance companies usually invest around 30 percent of holdings in common stocks."

Quoted Article: https://finance.zacks.com/insurance-com ... 11120.html

Another Article: https://www.naic.org/capital_markets_archive/110819.htm

[leveragedbuyout]

Since both government bonds and the purposed global corporate bonds will never default, there is no differentiation between them. And it doesn't make sense to have one's yield higher than the other when they both never default.

Let me put it this way: If global corporate bonds offer higher yield than government bonds and both never default, then nobody will ever buy government bonds.

In view of this, just adding either one of them to the game will be enough for serving the purpose of providing an investment vehicle for insurance companies to earn interest from its vast stockpile of cash.