In the US the two and five year yields have risen by 62 bps and 25 bps from April 1, 2005 to Dec 23, while the ten year bond has seen fields fall by 8 bps during the same period.
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Current bond markets: Bond markets have seen flattening of the curve in India. The Indian Government Bond yield curve has flattened considerably during the period April1, 2004 to December 23, 2005. The table below gives the current yield curve and change in yield curve from April 1, 2005.
In India one year yields have risen by 77 bps in the period April 1, 2005 to December 23, 2005, while the five and ten year yields have moved up only by 21 and 32 bps respectively. Simple calculations will tell investors that short duration portfolios have lost heavily in value as compared to the long duration portfolios.
This is assuming that the risk measured in terms of PV01 (Price Value of 1bps change in interest rates) is the same for short and long duration portfolios.
In the US the two and five year yields have risen by 62 bps and 25 bps respectively from April 1, 2005 to December 23, 2005, while the ten year bond has seen fields fall by 8 bps during the same period.
The curve is completely flat now with 2,5 and 10 year bonds all trading at same yields.
Investor Awareness: The aim of this article is to make investors aware of the intricacies of fixed income markets. For example, investing in short term plans as a risk averse investment, may backfire heavily as the yield curve flattens further.
Investors should now look at their fixed income investments and ask questions on duration of portfolios, movements along yield curve and whether the Indian yield curve can go the US way.
They should also check how fund managers have played the yield curve and taken decisions on making right investments as the yield curve flattens or steepens or becomes inverted. The next time your advisor says low duration = low risk, probe further and if answers do not suit, change your advisor. (Concluded)
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