Wednesday, August 12, 2009

Some comment on bond market performance

Just want to follow your stuff yesterday with some comments on bond market performance in recent time. Like you, I am awaiting statements from FED's policy meeting today. I definitely agree with you that what Bernake say is strongly driving the market. As it may provide players official comment how the American economy is, and even for the global market. However, in term of fixed income aspect, i think that this meeting will be like others before; FED will keep its interest benchmark policy unchanged. Earlier this year, speculators thought that it would lift prime interest within this year, which drove significantly market as 10year Treasury yield has moved largely with a variance band of 80bps and has reached nearby 4%, the highest level since December 2008. It was one of key reasons boosted fixed income players’ performance.

A principle that many bond investors always keep in mind is that when the economy is weaker, it is bullish for bond market. In attempting to recover the economy, central bank will decrease it benchmark rate. Consequently, it will down bond yields and therefore bond price will rally. ( bond yield and price move inversely). Another factor that fixed income market becomes more profitable in compare to stock or commodity in the context of the weaker economy is credit spread or risk premium. The more volatile the market is, the higher the risk premium. Except Treasury debt as considered as free risk, others will have certain risk levels depend on their own characteristic. Bond yield (include both government and corporate bonds) comprises free risk rate and risk premium. Therefore, along with a pool of good news on business performances of companies released last time, the economy is showing signs of stability or even recovers from the recession. It means that business environment is getting better, which helps to narrow risk premium for debt instruments. As a result, bond yield decreases and its price obviously rise. Such factors fundamentally drove the bond market in recent time.

I wish to give you guys a more datable view on bonds in emerging markets, those are considered pretty active so far.


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