Transcript Indian Bond Market some interesting features

Bond Markets
Some Interesting Features
Kandarp mehta
Icfaian business school, ahmedabad
Yield Curve of Indian Bonds
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A plot of the yield (YTM) on various debt instruments against the time to
maturity. This is known as the yield curve
Under normal circumstances, bonds with longer time to maturity will offer
a greater return as there is a far greater element of uncertainty and
therefore, risk (high risk-high return)
Understanding the forces that shape the yield curve, investors can make
qualified decisions in selecting bonds
The yield curve’s slope changes as various factors affect the pricing of
debt market instruments
For example take a yield curve that is flat instead of the normal upward
sloping curve. In such a scenario, if you were confident that normalcy
would return to the markets, you should sell long-term bonds and buy
short-term bonds
Source: Debt to Date,SHCIL,Issue no.14
Factors Affecting Yield Curve
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The monetary policy
Economic growth
Fiscal Policy
inflation
fact-sheet India
Asian Bond Markets - Some Signals
Monetary Policy
Tight Monetary
policy
Selling of
bonds
Reduction
in price of
Bonds
Yield Curve
steepens
Liberal Monetary
policy
Yield Curve
Flattens
Buying of
bonds
Increase in
price of
Bonds
Interest rates also have a negative
relationship with the slope of the yield
curve
Economic Growth
Poor Economic
Condition
Surplus money
diverted to
Debt Market
Lower / poor
allocation of
capital
Banks saddled
with surplus
funds
Increase in Bond
prices / Reduced
Yields
Sudden increase in Bond Market Turnover which is largely attributable
to Value increase should not be perceived is revival of Economy. It may
be a “False-Boom”.
Fiscal Policy
Higher Fiscal
Deficit
Higher
interest rates
Steep yield
curve
Lower Fiscal
Deficit
Lower
interest rates
Flat yield
curve
Precarious
Financial
Situation
Short Term
Rates > Long
Term rates
Steep and
negatively
sloped yield
curve
Improving
Economic
Situation
Short Term
Rates < Long
Term rates
Positively sloped
yield curve
(Degree of slope
will depend upon
intensity of
expectations)
Inflation
Increase in
inflation
Real Rate of
Return
declines
Expected yield
goes up to
cover up the
decline
Yield curve
will be
flattened
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Inflation affects both the long term and the short term yields.
Fact sheet India
• Poor run at equity markets made debt
markets more attractive.
• However, it remains to be seen whether
the demand is more of short-term
instrument or for long-term instruments.
Fact sheet - India (Contd…)
• Gross fiscal deficit (Q1 - FY 02) - Rs 422 bn
• Gross fiscal deficit (Q1 - FY 01) - Rs 251 bn
(68% increase)
• Reason for the increase
• over 40% drop in revenue receipts - caused by a 54% dip in
corporate tax collections - which was on account of lower
earnings by the corporate
• This clearly points to the slowing economy. Also, the actual
expenditure of the government at Rs 651 bn was higher by 14%
compared to 1QFY01
Fact sheet - India (contd..)
Try to make inferences from the data given below
(Rs bn)
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00 (RE)
2000-01(BE)
Gross Fiscal
Deficit
363
402
603
577
602
602
889
1,133
1,089
1,113
Internal Finance
Other
Market
91 days
borrowings and
borrowings*
Treasury bills $
liabilities
75
165
69
37
189
123
289
153
110
203
328
10
331
170
98
200
306
132
325
563
-9
690
427
-2
771
349
35
764
349 -
External
Finance
54
53
51
36
3
30
11
19
9
0
Fact sheet - India (contd..)
Try to make inferences from the data given below
FY98
FY99
FY00
(Rs bn)
No of issue
Amount
No of issue
Amount
No of issue Amount
Debentures
12
19.7
12
23.9
10
24
Prospects
6
10.2
9
22.6
9
23.7
Rights
6
9.4
3
1.2
1
0.3
Convertible
10
14.7
5
1.9
2
0.5
Prospects
4
5.2
2
0.6
1
0.2
Rights
6
9.4
3
1.2
1
0.3
Non-convertible
2
5
7
22
8
23.5
Prospects
2
5
7
22
8
23.5
Rights
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Asian Bond Markets
Crisis Barometer
The Last Word...
• “For creation of a stable, strong and liquid
Bond market, it is essential for any country
to construct a reliable and stable Yield
Curve”.
– Robert Becker (McKinsey)