Bloomberg Market Concept-Fixed Income

Mix Fin&fun
Mar 27, 2016
3 min read

1. The roots of the bond market

US government deficit
US 10 year gov bond yield vs fear gauge (opposite)
Q: investors have bought the very instruments that were downgraded=>the safe haven nature of US gov bonds was alluring amidst rising volatility. When credit ratings are cut, this typically pushes bond price down and yields up->as the downgrade was driven by politicking and not genuine credit concerns, the safe haven nature of US gov bonds predominated over the momentous, yet cosmetic, downgrade. The seeming paradoc was not so paradoxical after all
Fixed income only means fixed amount of money returned (repayment fixed), instead of fixed price
APR=yield=>price of bond, changes; higher yield, lower price
Use yield to compare bonds

2. Bond valuation

Bond yield (compare price paid & money get)
Bond valuation:

Credit risk (three factors; Debt/GDP Q: why Japan gov bond yield so low: an aging population/long-term stimulation of the economy; deficit/GDP, repayment schedule)
Credit risk indicators: credit rating/ credit default swaps

Macroeconomics
Inflation high->yield high, borrower benefit from inflation, lender cry

Q: what is the major risk of a gov being reliant on short term financing->investors may pull the rug when it comes time to refinance the debt

There is no general rule for debt/GDP will make a gov bond yield spike or not

3. Central bankers and interest rates

Central bank mandates (to prevent runway inflation &deflation):
The happy medium:
Inflation: war->inflation German: 24,380% inflation after world war 1; Zimbabwe: crazy inflation; populist government spending at the expense of elevated inflation.
Deflation:
Central Bank decision-making
Inflation measure: 1. GDP deflator; 2. CPI (most frequently, common tool); 3. Core personal consumer expenditure (favorite inflation gauge of the Federal Reserve)//TIPS: treasury inflation protected securitiesàcompensated lender with inflation according to CPI
Output GAP%= (actual output $B-potential output $B)/potential output $Bàgauge slack in economy (central banks will look at GDP growth typically as an input for the output gap

Q: nominal GDP growth is not a major statistic used by the central bank to set interest rates

Central bank toolkit
Short-term interest rates: output gap=>change interest rate
Statements: proposal/disclose

Q: the Federal Reserve rate hike in 1980->successful move

The size of the output gat has best explained Federal Reserve interest rate decisions over the last 20 years

4. The yield curve and why it matters

Maturity &yield: 10year/3month term premium= 10 year yield-3 month yield
Transmission mechanisms
Corporate impact

Kellogg’s yield curve (all corporate curve) - US yield curve=spread -> the tightening of the corporate spread have an impact that tend to expand the borrowing capacity of the company

Consumer impact
Global impact

5. Movement in yield curve

Central bank affects left end of interest yield (short term interest rate)—Central bank set the temperature; Federal target rate
Right hand: is driven by bond trading/long term yield drivers: Interest rate forecast/long-term GDP growth estimates/demographics/demand for long-term borrowing/supply of long-term lending/ inflation expectation (most powerful)
US Yield curve & real GDP growth =>inverted yield curve (recession time indicator) us such a good economic indicator because: bond investors study central banks closely/the bond market is by far the largest market in the world/ the yield is derived from bets placed by the largest fund managers

Q: a steep yield curve is a classic sign of a booming economy->signals improving times; a flat yield curve signals worsening times/ if a yield curve is steep, the prices of long-term bonds are relatively low; because investors indiscriminately bought the safest asset in the world as a safe have-> US yield curve shift downwards after 9.11

Terminal Functions:

WCAP: display stock market capitalizations of entire country stock markets around

SRCH: fixed income serach

BUDG: provides data and analytics on the US Federal Budget;

YAS: yields and spreads on government bonds

DEBT: ownership statistics of sovereign debt for selected countries including US

STNIFOMC: side-by-side comparisons of official statements from the FOMC

CAST: a visualization of issuer capital structure

DDIS: a visualization of issuer debt repayment schedules

GY: a historic yield chart for a selected bond

WB: monitor major sovereign bond yield and spread

WCDM: a country debt monitor analyzing the financial condition of countries for debt investors