Analysing and Interpreting the Yield Curve

Moorad Choudhry

• Publisher: Wiley
• Year: 2019
• ISBN:
  9781119141051
• Edition: 2
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Understand and interpret the global debt capital markets

Now in a completely updated and expanded edition, this is a technical guide to the yield curve, a key indicator of the global capital markets and the understanding and accurate prediction of which is critical to all market participants. Being able to accurately and timely predict the shape and direction of the curve permits practitioners to consistently outperform the market.

Analysing and Interpreting the Yield Curve, 2 nd Edition describes what the yield curve is, explains what it tells participants, outlines the significance of certain shapes that the curve assumes and, most importantly, demonstrates what factors drive it and how it is modelled and used.

• Covers the FTP curve, the multi-currency curve, CSA, OIS-Libor and 3-curve models
• Gets you up to speed on the secured curve
• Describes application of theoretical versus market curve relative value trading
• Explains the concept of the risk-free rate
• Accessible demonstration of curve interpolation best-practice using cubic spline, Nelson-Siegel and Svensson 94 models

This advanced text is essential reading for traders, asset managers, bankers and financial analysts, as well as graduate students in banking and finance.

PART I
Introduction to the Yield Curve

In Part I we describe the yield curve itself. The bulk of the discussion is in Chapter 1, which looks at the different types of yield curve and, more importantly, introduces the main theories of the yield curve. We also look at interpreting the curve. The language is non‐specialist and should be accessible to anyone with an involvement in the financial markets. This is followed by a look at spot and forward rates, and the derivation of such rates from market yields.

For this second edition we have relegated the introductory chapter on bond yield measurement to the main Appendix.

CHAPTER 1
The Yield Curve

The main measure of return associated with holding bonds is the yield to maturity (YTM) or gross redemption yield (GRY). In developed markets there is usually a large number of bonds trading at one time, at different yields and with varying terms to maturity. Investors and traders frequently examine the relationship between the yields on bonds that are in the same class. Plotting yields of bonds that differ only in their term to maturity produces the yield curve. The yield curve is an important indicator and knowledge source of the state of a debt capital market.¹ It is sometimes referred to as the term structure of interest rates, but strictly speaking this is not correct, as this expression should be reserved for the zero‐coupon yield curve only. We shall examine this in detail later.

Much of the analysis and pricing activity that takes place in the bond markets revolves around the yield curve. The yield curve describes the relationship between a particular redemption yield and a bond's maturity. We should be aware that the GRY of a bond is only ever the actual yield one receives during the period one holds the bond if certain specific, and generally unrealistic, conditions are met. However, we will leave the discussion of this for later.

Plotting the yields of bonds along the maturity term structure will give us our yield curve. It is very important that only bonds from the same class of issuer or with the same degree of liquidity are used when plotting the yield curve. For example, a curve may be constructed for UK gilts or for AA‐rated sterling Eurobonds, but not a mixture of both, because gilts and Eurobonds are bonds from different class issuers. The primary yield curve in any domestic capital market is the government bond yield curve, so for example, in the US market it is the US Treasury yield curve. With the advent of the euro currency in 11 (ultimately 19) countries of...

Table of contents

• Cover
• Table of Contents
• Foreword
• Preface
• Preface to the First Edition
• Acknowledgments
• About the Author
• PART I: Introduction to the Yield Curve
• PART II: Yield Curve Modelling and Post‐2008 Yield Curve Analytics
• PART III: Fitting the Yield Curve
• PART IV: Yield Curves and Relative Value Trading
• APPENDIX: Bond Yield Measurement
• Index
• End User License Agreement