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					                              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
•   Treasurys
•   Agencies of governments
•   Municipals: GOs and revenue bonds
•   Foreign-government bonds
•   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 (minibonds)

     (c) 2001 by Russell G. Todd
      The Yield Curve




Source: Bloomberg.com
BBB Yield vs. 10-Year Treasury Yield
The higher the difference, the more the market
is anticipating trouble.
   10

     9                                                                   BBB
                                                                         10-yrtreas
     8

     7

     6

     5

     4

     3

     2

     1

     0
       1


                 3



                           5



                                     7



                                               9




                                                                    1



                                                                              3



                                                                                        5


                                                                                                  7
                                                         11
      M


                M



                          M



                                    M



                                              M




                                                                   M



                                                                             M



                                                                                       M


                                                                                                 M
                                                        M
   98


             99



                       00



                                 01



                                           02




                                                                05



                                                                          06



                                                                                    07


                                                                                              08
                                                     03
 19


           19



                     20



                               20



                                         20




                                                              20



                                                                        20



                                                                                  20


                                                                                            20
                                                   20




Source: freelunch.com
BBB Yields Minus 10-year U.S. Treasury Yields
As crisis nears, notice how this spread widens
    7



    6



    5



    4



    3



    2



    1



    0
      1



                3



                          5



                                    7



                                              9




                                                                   1



                                                                             3



                                                                                       5



                                                                                                 7
                                                        11
     M



               M



                         M



                                   M



                                             M




                                                                  M



                                                                            M



                                                                                      M



                                                                                                M
                                                       M
  98



            99



                      00



                                01



                                          02




                                                               05



                                                                         06



                                                                                   07



                                                                                             08
                                                    03
19



          19



                    20



                              20



                                        20




                                                             20



                                                                       20



                                                                                 20



                                                                                           20
                                                  20
                        1/
                          2/
                            19




                                   0
                                       0.5
                                             1
                                                 1.5
                                                       2
                                                           2.5
                                                                 3
                                                                     3.5
                              86
                        7/
                          2/
                            19
                              86
                        1/
                          2/
                            19
                              87
                        7/
                          2/
                            19
                              87
                        1/
                          2/
                            19
                              88
                        7/
                          2/
                            19
                              88
                        1/
                          2/
                            19
                              89
                        7/
                          2/
                            19
                              89
                        1/
                          2/
                            19
                              90
                        7/
                          2/
                            19
                              90
                        1/
                          2/
                            19
                              91
                        7/
                          2/
                            19
                              91
                        1/
                          2/
                            19
                              92
                        7/
                          2/
                            19
                              92
                        1/
                          2/
                            19
                              93




Source: Freelunch.com
                        7/
                          2/
                            19
                              93
                        1/
                          2/
                            19
                              94
                        7/
                          2/
                            19
                              94
                        1/
                          2/
                            19
                              95
                        7/
                          2/
                            19
                              95
                                                                           Baa Bonds - 30 Treasury




                        1/
                          2/
                            19
                              96
                        7/
                          2/
                            19
                              96
                        1/
                          2/
                            19
                              97
                        7/
                          2/
                            19
                              97
                        1/
                          2/
                            19
                              98
                        7/
                          2/
                            19
                              98
                        1/
                          2/
                            19
                              99
                        7/
                          2/
                            19
                              99
                                                                                                     Corporate Spreads




                        1/
                          2/
                            20
                              00
                        7/
                          2/
                            20
                              00
                        1/
                          2/
                            20
                              01
                        7/
                          2/
                            20
                              01
                        1/
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                              02
                        7/
                          2/
                            20
                              02
                        1/
                          2/
                            20
                              03
                         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

				
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