financial markets bond markets stock markets foreign-exchange market commodities & futures...
TRANSCRIPT
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
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
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
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
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
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
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
The Yield Curve
Source: Bloomberg.com, March 26. 2010
Treasurys vs. Corporates
0
1
2
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
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
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