Government Bond and Corporate Bond Yield Curves Arjun Parthasarathy Founder INRBONDS.com 1
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
Government Bond Yield Curve 3
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
Factors Determining Shapes Economic Growth and Inflation Central Bank Policies Liquidity Market Segmentation Government Borrowing 5
10.00% US Yield Curve October 2006 9.00% 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
2001-07-01 2001-12-01 2002-05-01 2002-10-01 2003-03-01 2003-08-01 2004-01-01 2004-06-01 2004-11-01 2005-04-01 2005-09-01 2006-02-01 2006-07-01 2006-12-01 2007-05-01 2007-10-01 2008-03-01 2008-08-01 2009-01-01 2009-06-01 2009-11-01 2010-04-01 2010-09-01 2011-02-01 2011-07-01 2011-12-01 2012-05-01 2012-10-01 2013-03-01 2013-08-01 2014-01-01 2014-06-01 Knowledge Workshop on Opportunities and Risks in Gilt and Credit Curves 21 st Nov 2014, Sofitel, BKC Mumbai 6.00 Fed Fund Rate % 5.00 4.00 3.00 2.00 1.00 0.00 7
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UST 10*5 Spread 18
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
Will UST-GOI Spreads Narrow? 20
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OIS Yield Curve Inverted 22
Flat Why is it flat? India Yield Curve RBI? Will it Fall and Steepen? 23
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
Five Year OIS below Five Year GOI 25
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
Maturity Pattern of Government Debt 27
Maturity Pattern Chart 28
Credit Spreads 29
Banks Stressed Assets 30
Stress Continuing 31
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Credit Spreads have Come Off 33
Credit Spreads have Come Off 34
Is Credit Outlook Improving? CRISIL Credit Ratio at 1.64x 1 st half of 2014-15 Credit Ratio was 0.62x and 0.79x in fiscal 2012-13 and 2013-14 respectively Credit ratio as measured by quantum of debt at 0.59x in 1 st half of 2014-15 35
Factors Determining Credit Spreads Risk Aversion Liquidity Economic Growth 36
30.00% Greek Yield Curve 2011 26.74% 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
Risk Aversion High risk aversion Rising credit spreads Low risk aversion- Falling credit spreads Credit spreads react fastest to risk aversion 38
ICICI Bank Five Year CDS 39
Tata Motors, SBI, ICICI Bank Five Year CDS 40
Asia Ex Japan Five Year CDS 41
Liquidity Drives Spreads 42
Euro Junk Bond Yields 43
Asian Five year Spreads Source: ADB 44
Asian Ten Year Spreads Source: ADB 45
Economic Growth High Growth Falling Credit Spreads Low Growth- Rising Credit Spreads Central Bank Intervention can pull down spreads despite low growth 46
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
AAA Credit Spreads 48
AAA Spread Curve 49
Credit Spread Curve 50
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
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
Liquidity Easy 53
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
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