Government Bond and Corporate Bond Yield Curves

Transcription

1 Government Bond and Corporate Bond Yield Curves Arjun Parthasarathy Founder INRBONDS.com 1

2 Agenda Government Bond Yield Curve Reading the present shape Corporate Bond Yield Curve and Credit Spread Curve Reading the present shape Movement in Government Bond and Corporate Bond Yield Curves and Credit Spreads going forward 2

3 Government Bond Yield Curve 3

4 Upward Slopping Yield Curve Inverted Yield Curve 1 yr 2 Yr 5 Yr 10 Yr 15 Yr 30 Yr 1 yr 2 Yr 5 Yr 10 Yr 15 Yr 30 Yr Flat Yields Curve Humped Yield Curve 1 yr 2 Yr 5 Yr 10 Yr 15 Yr 30 Yr 1 yr 2 Yr 5 Yr 10 Yr 15 Yr 30 Yr 4

5 Factors Determining Shapes Economic Growth and Inflation Central Bank Policies Liquidity Market Segmentation Government Borrowing 5

6 10.00% US Yield Curve October % 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 5.06% 4.86% 4.76% 4.79% 4.93% 2.00% 1.00% 0.00% 1 Yr 2 Yr 5 Yr 10 Yr 30 Yr 6

7 Knowledge Workshop on Opportunities and Risks in Gilt and Credit Curves 21 st Nov 2014, Sofitel, BKC Mumbai 6.00 Fed Fund Rate %

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18 UST 10*5 Spread 18

19 US and Eurozone Different Paths Fed to start raising rates in 2015 Short end to rise even as long end factors in lack of inflation ECB to hold on to low rates much longer than the Fed Flat curves Implications for Ten Year GOI 19

20 Will UST-GOI Spreads Narrow? 20

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22 OIS Yield Curve Inverted 22

23 Flat Why is it flat? India Yield Curve RBI? Will it Fall and Steepen? 23

24 Case for Yield Curve Falling CPI inflation expectations being held at below 6% Government sticking to fiscal deficit target of 3% of GDP Global yields holding at lower levels 24

25 Five Year OIS below Five Year GOI 25

26 Case for Yield Curve Steepening RBI lowering Repo rate and managing liquidity at around repo rate Growth expectations picking up Government keen on elongating maturity profile of debt 26

27 Maturity Pattern of Government Debt 27

28 Maturity Pattern Chart 28

29 Credit Spreads 29

30 Banks Stressed Assets 30

31 Stress Continuing 31

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33 Credit Spreads have Come Off 33

34 Credit Spreads have Come Off 34

35 Is Credit Outlook Improving? CRISIL Credit Ratio at 1.64x 1 st half of Credit Ratio was 0.62x and 0.79x in fiscal and respectively Credit ratio as measured by quantum of debt at 0.59x in 1 st half of

36 Factors Determining Credit Spreads Risk Aversion Liquidity Economic Growth 36

37 30.00% Greek Yield Curve % 25.00% 24% 20.00% 15.00% 15.90% 10.00% 10.06% 5.00% 0.00% 3 Yr 5 Yr 10 Yr 30 Yr 37

38 Risk Aversion High risk aversion Rising credit spreads Low risk aversion- Falling credit spreads Credit spreads react fastest to risk aversion 38

39 ICICI Bank Five Year CDS 39

40 Tata Motors, SBI, ICICI Bank Five Year CDS 40

41 Asia Ex Japan Five Year CDS 41

42 Liquidity Drives Spreads 42

43 Euro Junk Bond Yields 43

44 Asian Five year Spreads Source: ADB 44

45 Asian Ten Year Spreads Source: ADB 45

46 Economic Growth High Growth Falling Credit Spreads Low Growth- Rising Credit Spreads Central Bank Intervention can pull down spreads despite low growth 46

47 India Credit Spreads Spreads narrow at higher levels of yields Insurance Cos, Provident Funds invest based on yields Spreads down the rating curve react to economic growth and liquidity Mutual Funds and FIIs drive spreads at the short end of the curve 47

48 AAA Credit Spreads 48

49 AAA Spread Curve 49

50 Credit Spread Curve 50

51 Outlook for Credit Spreads Economic growth expected to pick up Liquidity likely to ease Attractive absolute levels of yields for FIIs Spreads to stay stable or trend down 51

52 Higher Economic Growth India s GDP growth at 4.7% in FY 2014 Forecast to grow at 5.6% in FY 15 and 6.4% in FY 16 Sensex, Nifty at record highs is improving prospects for over leveraged corporates 52

53 Liquidity Easy 53

54 Yields Attractive for FIIs Corporate bond yields upwards of 8.4% across the rating curve Borrowing costs below 0.5% for FIIs and could touch 2% by end 2016 on Fed rate hikes Spreads highly attractive especially given low levels of yields across the world 54

55 Thank You Information herein is believed to be reliable but Arjun Parthasarathy Editor: INRBONDS.com and Zephyr Financial Publishers Private Limited does not warrant its completeness or accuracy. Opinions and estimates are subject to change without notice. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The financial markets are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved. Unauthorized copying, distribution or sale of this publication is strictly prohibited. The author(s) of the content published in the site INRBONDS.com may or may not have investments in the assets discussed in the pages/posts. Copyright INRBONDS.com by Arjun Parthasarathy