Thursday, December 31, 2009

Economics 31/12/2009: Bond markets

Food for thought: rummaging through backlogged papers, I cam across 3 notes from our heroic stockbrokers' bonds desks singing songs about the right timings for investment in bonds. These trace back to June and October 2009.

So I asked myself the following question: should I have listened to your brokers' advice to buy Irish or US bonds in 2009?

Well, here are two tables giving a breakdown on bond price sensitivities to changes in interest rates. The US table:And the Irish table is here:Now, in darker blue I marked the cells corresponding to the reasonably plausible scenario for yields for 2010. In lighter blue - the next best predictions. So go figures - should you have listened to anyone pushing Irish or US bonds onto you?

Think of the following numbers - I don't have the same for the Irish markets - in the US, cash inflows into bond funds markets amounted to some USD313 billion in 2009, as yields kept on dropping to artificially low levels on the back of the US Fed buying up Federal paper. At the same time, as stock markets rallied, just USD2 billion net was added to stocks funds. (Numbers are to November 1, 2009). Some has been fooled.

So a Happy New Year for all and best wishes for the new decade!

My next post will be already in 2010 and will show comparative performance for Irish banking sector relative to other EU states - the latest data - for 2008.


Mai said...

Hi Constantin,

I would just like to wish you and your family a healthy and prosperous 2010 and thanks for all your dedicated postings - it has made very interesting and sometimes scary reading (all 384 posts this year!!)especially those on NAMA. Although I don't know where you find the time to blog so much (because then I have to find the time to read them all - just kidding!!)
I look forward to your future updates next year.Keep well.

Best regards


Anonymous said...

As Bonds are priced at current market interest rates do your calculations take account of deflation and the effect this has on nominal rates?.
In other words the bonds current yield and its internal rate of return could be markedly different if 'real' ineterest rates are several times the nominal rate.