Yesterday I was going through some of the Indian newspapers and surprised to see some articles on Indian debt market, which is a very rare scenario where the Indian market is dominated by equities. May be it was more a tax saving investment as the equity market where more volatile and IPOs were flopped.
Whereas the developed world debt market dominates where the bond market, has experiences gains and losses in response to cyclical interest-rate, It’s like business cycle during which an economy expands, contracts and recovers could be termed as market cycle.
Before getting back to the Indian bond market let’s try to see the key components of Fixed Income securities, it’s the Credit quality, yield, and maturities are key components of fixed-income securities.
Continue reading “Fixed Income Investments in Indian Market”
Recently sharing and discussing on the economic growth and the debt market yield spread impact recalled me some work I did in the past and its worth sharing,
The abstract was based on the evidence that yield spread can serve as a leading indicator of economic activity.It’s important to understand few basic concepts before moving forward:
YIELD SPREAD: The difference between yield of long-term debt and short-term debt instrument is known as yield spread. Higher the difference between instruments greater will be the yield spread.
For example, if the 05-year Treasury bond is at 3% and the 20-year Treasury bond is at 4%, the yield spread between the two debt instruments is 1% (4% – 3%). Continue reading “Economic Growth and Yield Spreads on Debt paper – Back to School”
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 :”
From the last Monetary policy RBI has started publishing Post Policy Conference Call with Researchers and Analysts providing transparency.
There are a lot of questions on the interest rates including MSF, LAF and OMOs.
You can read the full edited script on RBI Website
With reference to the above lets focus on The “term structure” of interest rates refers to the relationship between bonds of different terms. When interest rates of bonds are plotted against their terms, this is called the “yield curve”. Economists and investors believe that the shape of the yield curve reflects the market’s future expectation for interest rates and the conditions for monetary policy.
Usually, longer term interest rates are higher than shorter term interest rates. This is called a “normal yield curve” and is thought to reflect the higher “inflation-risk premium” that investors demand for longer term bonds. Continue reading “RBI rate hike and the Term Structure”
As I posted yesterday on the Inverted Yield curve, as the future yield is a function of the expected spot rate and the term premium, either of which could go up or down separately or together. The talented RBI researchers should come out with their interpretation of the current yield trends of gilts in the forthcoming Annual Report of the Bank. So let’s try to build analogy on Term structure moving forward.
The “term structure” of interest rates refers to the relationship between bonds of different terms. When interest rates of bonds are plotted against their terms, this is called the “yield curve”. Economists and investors believe that the shape of the yield curve reflects the market’s future expectation for interest rates and the conditions for monetary policy. Continue reading “Term structure of Interest rates”