Introduction to Fixed Income Markets
Introduction to Fixed Income Markets
Coupon
Yield
Principal
Issued at par 100
1/32nds or 0.01s of 100
Bond prices – secondary markets
2x size of Equity markets
USD issuance dominates
US Debt markets
2013 data
The creation and use of a yield curve is one of the most vital aspects in a nation’s economic and financial development
A yield curve line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year government debt.
A yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.
A nation’s yield curve provides a remarkably reliable indicator for current – and future – economic conditions
– It represents the collective knowledge of all financial participants.
Central bank changes of the overnight rate forces responses in the banking process
Those responses lead to other – often predictable – responses (eg, when short rates rise to a point where it becomes more expensive to borrow than to lend)
Let’s now take a look at some of those sorts of changes…
Corporate curve
%
Time
1 yr 2yr 3yr 5yr 7yr 10y 30y
12
10
8
6
4
2
Government curve
“AA” rated
“A” rated
The “spread”
Yield curve
%
Time
1 yr 2yr 3yr 5yr 7yr 10y 30y
12
10
8
6
4
2
“Flat” curve
“Normal” Curve
“Steep” curve
“Inverted” Curve
US Treasuries – Bloomberg screenshot
8
Treasury Bond Price Quotes
in the U.S (Hull p.157-162)
Cash price = Quoted price + accrued interest (coupons)
IC301
9
9
Treasury futures contracts summary
10
https://www.cmegroup.com/education/files/understanding-treasury-futures.pdf
10
Quotation practices
11
US Treasury auction cycle
12
10 year USTs – Bloomberg snapshot
13
On the run and off the run securities
14
Rolls and liquidity
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