As Federal Reserve Chairman Ben Bernanke’s tenure draws to a close, these are the top 10 take away from the last night :
1. Janet Yellen voter to taper
2. Taper nothing more than symbolic – $10B split between Treasuries and MBS
3. Fed changes forward guidance – Low rates now appropriate “well past the time that the unemployment rate drops below 6.5%”
4. Bernanke believes FOMC will taper QE probably at each meeting, $10B each time with end of QE before 2014 year end Continue reading “Top 10 Takeaways from FOMC and Bernanke”
What determines the shape of the zero curve? Why is it sometimes downward sloping sometimes upward sloping and sometimes partly upward sloping and sometimes partly downward sloping?
Lot of theories have been proposed but the simplest one is the expectation theory which conjectures that long-term interest rates should reflect the expected future short-term interest rates. More precisely, it argues that the forward interest rates corresponding to a certain future period is equal to the expected future zero interest rate for that period. Continue reading “Theories on Term structure of interest rates :”
In one of the speech by Jeremy Stein a Federal Reserve Governor brought on board just last year,received a lot of attention for its suggestion that monetary tools might be used in addressing credit market-overheating. That is an interesting argument, but I don’t want to deal with that today. Rather, I want to look at Stein’s comments on collateral transformation:
Collateral transformation is best explained with an example.
Imagine an insurance company that wants to engage in a derivatives transaction. To do so, it is required to post collateral with a clearinghouse, and, because the clearinghouse has high standards, the collateral mustbe “pristine”–that is, it has to be in the form of Treasury securities. Continue reading “Credit Markets – Collateral and Margin calls”
I do not know why but somebody wanted me to define some basics on Yield spreads, that whether Yield spreads can judge the risk environment in an economy ?
Yield spreads are good tools to judge the risk environment in an economy a lower yield spread means that the issuer of debt is in a situation to demand loans at a lower spread above the yield of government security which in turn shows the presence of ample liquidity.
As far as economic growth is concerned a lower yield spread indicates greater amount of liquidity available for growth and entrepreneurial practices as well as a negative impact on the front of inflation. Continue reading “Simplifying the Yield curve”
I have quarried in the past that risk free rate for doing the valuation of equities and got some interesting answers, wanted to share here.
This is holistic view where an average of 10 year debt YTM of five lowest ratio of govt debt to GDP:
The 10yr Treasury is still a decent risk free rate, but the U.S.’s sovereign debt load will soon match Greece‘s. It may already exceed that level if you count the unfunded liabilities of entitlement programs. Continue reading “All about Risk free Rate”