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Carry interest rate futures, to avoid the risk of the bond market

Author: Anonymous From: www.yourpaper.net Posted: 2009-03-30 17:17:24 Read:
The People's Bank recently published the second quarter of 2002, "Monetary Policy Report, the financial institutions to hold a large number of low-rate government bonds implied risk as a separate one content disclosure. The regulatory authorities have noticed that the 2002 half of the government bonds market standard interest rates continue to decline, financial institutions in the hands of some large number of low-interest long-term fixed-rate bonds in the coming times of inflation, will be a huge loss. Many financial institutions in order to avoid risks, has begun spontaneously scattered bond forwards and swaps hedging transactions. Obviously, in a stock up to 1.6 trillion bond market, just only to carry out the current lending transactions undoubtedly healthy development of adverse market, institutional investors need to hedge trading tools. This article intends to explain the introduction of interest rate futures in the circumvention of these risks through the analysis of the current bond market risk.
First, the interest rate risk on the bond market analysis
The so-called interest rate risk is due to changes in interest rates, the price or rate of return of the underlying assets become lower or liabilities become even greater. For bond assets, by its very nature is a kind of interest rate sensitive assets. In theory, the total the bond asset price P can be expressed as:
P = f (R, r.t), and dP / dR> 0, dP /
Where R represents the coupon rate; r represents the market interest rate or yield; t bonds on behalf of the remaining period. In the case of the other conditions remain unchanged, the lower the coupon rate of the bond, the bond prices lower; higher market interest rates or yields, lower bond prices. Obviously, changes in market interest rates would inevitably lead to changes in bond prices, which will give the bondholders risks.
(A) the interest rate market and bond market development
The past 20 years, with the process of China's financial market continues, the constant increase of interest rate market, the interest rate decision mechanism is the progressive realization of the transition to the market to determine the administrative control.
From the bond issuance market, in August 1995, the Ministry of Finance began the trial to take market tender issue bonds, has been the transition to the mode of most of the national debt through the issue of no pre-tender price range. The especially first issued in 2001 for 15 years, 20-year and 30-year government bonds, government bonds auction issue yield market to speed up the process, the Treasury bill rate to the benchmark interest rate forward.
The growing improvement of the secondary bond market, also played an important role in promoting the interest rate market. The secondary bond market in 1988 to establish, in 1991, the introduction of repo transactions, bonds increasingly become a widely accepted financial assets. Bonds and repurchase transactions exceeded 5 trillion by the end of 2001, as well as the People's Bank of open market operations work. Bond plus purchase interest rate has become the highest interest rates in the form of a degree of market-oriented, an important indicator of the People's Bank of monetary policy, and market-oriented interest rates for bank deposits and loans to generate greater impetus.
(B) the interest rate risk of the bond market faces
From the current status quo of China's bond market, whether it is the issue of market or circulation market there is greater interest rate risk.
(1) The interest rate risk on the distribution market
The issue market point of view, to speed up the frequency of the primary market bond issuance, bond tender issued by lower interest rates. In the first half of 2002, the issue of government bonds and financial bonds 17 issued a total of 305.5 billion yuan, of which 20 billion yuan issued in the Exchange, a period of 10 years, the coupon rate of 2.54%; inter-bank bond market six 180 billion yuan of treasury bonds weighted average maturity of 9.06 years; financial bonds issued by CDB 6 700 billion, as the average maturity of 12.93 years. Treasury bonds and policy bank financial bonds issued record low interest rates, especially the May 23 issue of the 30-year Treasury bond the tender interest rates fell to 2.90%, exceeding the expectations of many investors.
Obviously, low bond the tender interest rates makes the bond asset value greatly reduced. Since most of the country recently published macroeconomic data, deflation eased significantly, greatly weakened the market expectations of future interest rate cuts began to emerge for the long-term low-interest bonds issued 9: In the July 2002 issue of treasury bonds 26 billion debt issuance amount of the plan does not run out. The great importance of the market for interest rate risk in the bond issue, and has begun to adversely affect the bond issue.
(2) The interest rate risk on liquid markets
Flow of the market from the point of view, the People's Bank of cuts, as well as the market for possible reform of the reserve system is expected to result in a declining market yields. This trend is more obvious, as shown below, since 1-5 months of 2002, the monthly bond yield curve continued down, in particular, the 30-year bond tender a 2.9% interest rate standard surface, only to June With 20-year yields to rise makes the yield curve is no further decline. The all 47 yield falls below 3% month the Treasuries weighted average yield fell to 2.18%, the average repo rate by the end of June fell to 1.965 percent from 2.204 percent at the beginning of the transaction on June 50 ȯ.
Increasing flatness of the yield curve reflects the market long-term debt Duanchao serious short-term behavior, the implied risk is huge. 30-year bond, for example, as long as the increase in interest rates by one percentage point, in terms of the duration of the yield to maturity of 2.90%, and its market price to fall to 19.95 yuan.
To this end, the People's Bank has already begun to take measures to mitigate potential interest rate risk, the most recent period of continuous operation through open market repurchase return of funds of 100 billion yuan, reduce the queues to purchase bonds in the bond market funds, in order to guide the repo rate is slow higher, ultimately achieve the purpose of the increase bond yields.
Second, the bond market liquidity risk analysis
(A) the bond market, the role of liquidity and
The liquidity of the market means that market participants can quickly carry out a large number of financial transactions and capital asset prices will not lead to significant fluctuations occur. Financial market microstructure theory usually three indicators measure the density, depth and flexibility of market liquidity (BIS, 1999):
Density: transaction prices deviate from the amplitude of the middle market prices, that has nothing to do with the market price of the transaction costs, which can usually bond bid-ask spread, said. The smaller the difference, the bond market more competitive, and therefore the higher the efficiency of the bond market.
Depth: it reflects the will not affect the current price of the market trading volume, can be used in a given time, the market maker trading volume of transactions quote said; also reflected by the turnover rate of the bonds.
3. Flexibility: refers to the speed of trading due to price fluctuations restore the balance. The elasticity represents potential depth of the market, this point is just hard to see from the current trading volume indicators. There is no better measure of usually is observed bond trading resumed after the speed of the normal state of the market (bid-ask spread, trading volume).
Government bond market as a major part of China's bond market, the market liquidity for the financial markets and the importance of monetary policy from the following aspects to understand:
First, due to the national debt risk is small, the large scale homogeneity, other financial assets (such as commercial paper, securitized assets (ABS), corporate bonds, etc.) pricing benchmarks and a number of derivative financial assets (such as repo, futures underlying assets, options, etc.), as well as traders to hedge the risk of an important tool. A rich mobility bond market, improve the efficiency of the financial system, to maintain the stability of the financial system, has a very important significance.
Second, the term structure formed by the bond market, able to respond to market participants of changes in interest rates, expectations and long-term interest rate trends, this information is both a bond yield curve to form estimates based on interest rate futures, but also to provide information for the implementation of monetary policy, so that the intent of the monetary policy to be effective conduction.
Third, the national debt is the most important central bank in the open market operation tools; Treasury market is the lack of liquidity, the central bank throughput of base money, the ability to adjust the total social credit will be limited, easy to excessive volatility in asset prices; addition, government bonds or countries means of foreign exchange reserves of the central bank.
In general, the financial markets in providing liquidity itself there will be some spontaneous institutional arrangements for the economy as a whole, but a rich depth and liquidity of the bond market can still be considered a "public good", it for each of the market participants and the economy as a whole benefits, on the other hand, the lack of a single market participants to promote and maintain market liquidity the enthusiasm, theoretical departments such as the Ministry of Finance and the Central Bank in promoting market liquidity aspects can and should play its due role.
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