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Friday 23 March 2012

Why Are Bond Yields So Low - Part 2



Why are Bond Yields So Low – Part 2

For those that read last week's post on bonds regarding why bond yields are at current low levels, this week's post should provide you with the answer. The background was that 10 year Treasury Notes are currently yielding around 2.3%, down from 5% pre GFC, and some think that there's still a possibility of re-testing lows at 1.67%. The bond yield is made up of two main components, the default risk of the bond issuer and future risk free rate expectations, and these broken down below.
 

Sunday 11 March 2012

Why are Bond Yields Low? - Part 1



Bond Yields

Before considering whether bond yields are high are low, it is important to understand what the bond yield reflects. A brief overview can be found in this previous post , but in summary they reflect the annual return that you should expect to receive (assuming the issuer default) from now until they mature. This is comprised of coupon payment made to the buyer of the bond (often semi annual), and any capital gain/loss that may occur as the bond moves towards its maturity value (e.g. $1000, 100,1000). A bond can therefore have the same yield by either paying a small coupon, and currently trading well below its maturity value (large capital gain from now until maturity) or by having a high coupon payment, and a small capital gain component.

Wednesday 7 March 2012

Trading Bonds

How to trade bonds

One of the keys to trading and investing profitably is the ability to trade bonds when stocks aren’t performing well, and vice versa. Trading bonds is no different from trading stocks – the same rules of technical analysis still apply, and the same catalysts move bond prices as well. When the government reduces interest rates over a period of time, stocks often rise (as they are cheaper to buy, though the reason interest rates are being reduced may have a negative impact on their prices), the local currency falls in value and the price of local bonds rises. The important part is to understand what exactly you are trading, and how it is affected by the economic news around you.