ALL THINGS BIG AND SMALL 2.0

A Bond is an instrument of debt with a date of maturity and an interest rate known as the yield. Whether issued by governments or corporations, it is an undertaking to return to the holder of the bond, the principal on maturity. In the meantime, the bond is traded like stocks and shares and forex in the market, and the bond’s price/yield fluctuates according to demand and supply.  While it is true that the yield is determined by many factors it is also true that one of the important factors relates to an investor’s perception of the country’s trustworthiness and/or risk of default. Yields represent what the investor believes is a fair interest rate to pay for holding the bond.  Look at the Table below showing the10-year bond yields of selected countries with yields arranged in descending order and you will see that this is true.  Notes and clarifications • Japan’s yield is so low partly because only 13% of Japanese Government 10-year Bond is held by foreigners. There is...

The daily gyrations and noise of the financial markets are these days exacerbated by algorithmic machine-trading. In addition, the high inter-connectedness of global markets and availability of instantaneous information leads to high correlation between all asset classes: equities, bonds, commodities and currencies; leading to higher and higher volatility via feedback loops until it crashes (nothing goes on forever  in such Chaos theory models). Like what happens when your electric guitar's signal feedback to the amplifier turns into a howl. Taking a longer term view helps in taking away the noise to view the fundamentals. The chart below shows US interest rate changes from 1965 to the present, as represented by the yield on 10-tear Treasuries. Superimposed on it, the Dow Jones Industrial Average and Singapore's Straits Times Index. The chart scale is logarithmic and changes are in % for comparability. The second chart shows yields for 5-years so that details can be vi...