Timeline for Bond Valuation and liquidity
Current License: CC BY-SA 3.0
17 events
| when toggle format | what | by | license | comment | |
|---|---|---|---|---|---|
| May 7, 2017 at 3:08 | comment | added | Helin | Let us continue this discussion in chat. | |
| May 7, 2017 at 3:08 | comment | added | quallenjäger | Well I get your point that there are many other factors. But I want to know why this is true in theory. For me the yield curve and zero rates should never be the same as one would prefer to buy bond with shorter maturity if the interest rate is the same. Therefore there must be a premium for long duration bond. | |
| May 7, 2017 at 2:59 | comment | added | Helin | I would say "in theory," this is true. In practice, no one expects ANY bond to trade at a zero spread. 1) If you talk to a good bond trader, they can tell you a story for each bond. 2) The theoretical curves may have biases themselves. What we actually do is to compare a bond's spread to their own history. For example, a bond may ALWAYS trade at a positive spread (cheap), but if it's more positive (cheaper) than usual, there might be a buying opportunity. | |
| May 7, 2017 at 2:57 | vote | accept | quallenjäger | ||
| May 7, 2017 at 2:55 | comment | added | quallenjäger | and I was confused by what does liquidity really affect on the equation. For me I don't see a clear connection either. | |
| May 7, 2017 at 2:54 | comment | added | quallenjäger | I see your point thanks. This is just an exception from a lecture notes. They introduced yield curve and Yield to maturity. Yield curve is the characteristic of the market, while the YTM is the characteristic of the bond. They claim for a perfect liquid market YTM and Yield curve is related through the given equation. | |
| May 7, 2017 at 2:48 | comment | added | Helin | Regarding 2008, recall these are very old bonds and most of them had been locked away in pension accounts and were not available to be traded. By contrast, the newly issued 10s had large float that can be readily traded. | |
| May 7, 2017 at 2:47 | comment | added | Helin | I don't think it's easy to generalize. The simplest (and completely) useless answer is that it all boils down to supply/demand pressure. More buying = richer; more selling = cheaper. Liquidity is always tricky. A super liquid bond can trade rich because everyone's buying it. But a super illiquid bond can also be rich because no one is willing to sell and you are desperate to buy at any price (2005 Treasury note futures squeeze). So simply knowing liquidity condition doesn't tell us the full picture. It might also help if you tell the community what you're trying to do. | |
| May 7, 2017 at 2:43 | comment | added | quallenjäger | And why people would prefer now a new bond with 10-years and dumping old seasoned 30-years bond? Their money are locked up for 10 years anyways. So they have same level of liquidity. | |
| May 7, 2017 at 2:40 | comment | added | quallenjäger | So overall, can I see it the market yield curve depends on liquid preference. If there is a perfect liquid money market account so that the investor doesn't care about the liquidity. Then the spread will be zero? | |
| May 7, 2017 at 2:37 | comment | added | Helin | These were original 30-year bonds that were issued 20+ years ago (at the time) and hence had <10-years to maturity. So they were very old and seasoned bonds. | |
| May 7, 2017 at 2:34 | comment | added | Helin | I have updated both charts. Y is the spread (in basis points), X is time to maturity. | |
| May 7, 2017 at 2:32 | history | edited | Helin | CC BY-SA 3.0 |
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| May 7, 2017 at 2:32 | comment | added | quallenjäger | It would be nice if you could provide some information of chart. I am still struggling to recognize it. What is on Y scale and X scale. Again thank you for the extensive answer. | |
| May 7, 2017 at 2:27 | history | edited | Helin | CC BY-SA 3.0 |
added 601 characters in body; added 4 characters in body
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| May 7, 2017 at 2:25 | comment | added | quallenjäger | Sorry but I cannot really understand the graph, is it one graph or two separate? I cannot see the fitted curve somehow. I see only green data points. | |
| May 7, 2017 at 2:20 | history | answered | Helin | CC BY-SA 3.0 |