financial markets bond markets stock markets foreign-exchange market commodities & futures...

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Financial Markets • Bond markets • Stock markets • Foreign-exchange market • Commodities & futures markets • Mutual funds & ETFs • International stocks & funds • OTC markets of all kinds! (c) 2001 by Russell G. Todd

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Page 1: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Financial Markets

• Bond markets

• Stock markets

• Foreign-exchange market

• Commodities & futures markets

• Mutual funds & ETFs

• International stocks & funds

• OTC markets of all kinds!

(c) 2001 by Russell G. Todd

Page 2: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Bond Markets

• Bond-buyers lend money in exchange for interest payments

• Governments, companies issue bonds• Inflation drives prices down, yields up• 10 times larger than stock market• Opaque market—quotes often hard to find• Rating agencies assess risks• Sensitive to economic indicators

(c) 2001 by Russell G. Todd

Page 3: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

What Moves Bonds

• Inflation sends yields up, prices down• Corporate bonds hinge on company health• Economic growth can send prices down• Better opportunities elsewhere• Growth brings inflation• Falling currency can bring prices down as

foreigners leave the market• Oversupply can bring prices down• Government bonds rise in a crisis

(c) 2001 by Russell G. Todd

Page 4: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Government Bonds

• U.S. Treasurys

• Agencies of governments

• Municipals: GOs and revenue bonds

• Foreign-government bonds (sovereigns)

• Supranational bonds

• Savings bonds

(c) 2001 by Russell G. Todd

Page 5: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Corporate Bonds

• Investment grade: few risks, AAA

• High-yield or “junk”: highest risk, CCC

• Everything in between

• Foreign companies issue bonds

• Companies not on stock market issue bonds

• Bond derivatives have exploded

(c) 2001 by Russell G. Todd

Page 6: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Bond-Market Jargon

• Quoted in 1/32 points (ticks): 96 3/32

• Simple yield= coupon/current price

• YTM=yield to maturity

• 10-year Treasury is reference bond

• Yield curve assesses economic prospects

• “Spreads” between less risky, more risky issues also assess prospects

(c) 2001 by Russell G. Todd

Page 7: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Other Bond Markets

• Eurobonds• Yankee & other $ bonds• Brady bonds• Other nation’s bonds• Foreign company bonds• FRNs, MTNs, etc.• Bonds that aren’t bonds (swaps,

minibonds)

(c) 2001 by Russell G. Todd

Page 8: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

The Yield Curve

Source: Bloomberg.com, March 26. 2010

Page 9: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Treasurys vs. Corporates

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3

4

5

6

7

8

9

10

2005

M1

2005

M6

2005

M11

2006

M4

2006

M9

2007

M2

2007

M7

2007

M12

2008

M5

2008

M10

2009

M3

2009

M8

2010

M1

Moody's Baa Index

10 Yr Treasury

When corporate yields rise away from Treasury yields, the market sees risk.

Source: Freelunch.com

Page 10: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Baa minus Treasury

0

1

2

3

4

5

6

7

2005

M1

2005

M5

2005

M9

2006

M1

2006

M5

2006

M9

2007

M1

2007

M5

2007

M9

2008

M1

2008

M5

2008

M9

2009

M1

2009

M5

2009

M9

2010

M1

Baa minus Treasury

Source: Freelunch.com

Another way of looking at the fear factor

Page 11: Financial Markets Bond markets Stock markets Foreign-exchange market Commodities & futures markets Mutual funds & ETFs International stocks & funds OTC

Bond-Rating Firms

• Firms assess issuer ability to repay

• Ratings run from AAA (best) to DDD, with variations among firms

• Major firms are Moody’s, Standard & Poors, Fitch

• They have blown it on derivatives

• Under pressure to get act together

(c) 2001 by Russell G. Todd