Bond yield curve impact the stock market
Bond yield
A yield curve is a relationship between market yields of interest bearing securities of different maturity lengths. Securities maturity time is the date on which the issue of the security. Govt securities maturity length is different.
Treasury bills which mature in less than one year , treasury notes with one to five years and long term treasury bonds prolong up to 20 years.
Normally, the longer the time to the maturity of a security, the higher it's yield. Thus treasury bills usually yield less than treasury bonds. This is called an 'upward sloping" yield curve. The nominal interest rate and interest spread both are impact the yield curve.
Upward sloping
An upward sloping yield curve is normal and is bullish for the stock market. Any deviation from an upward sloping yield curve is bearish. If treasury bill yield more than bonds, because of three reason,
Abnormal need for short term fund
Short term inflationary pressure
Central banks monetary tightness.
All of these situations have bearish implications for stock prices, because liquidity problems , inflationary pressures, and monetary stringency upset the normal day to day course of business, harming companies. Normal upward sloping yield usually precedes and accompanies rising stock prices.
Interest rate spreads
A valuable supplement to the yield curve indicator is the yield curve indicator is the " interest rate spread" which is calculated by subtracting the yield of a short term fixed income security from the yield of a long term, fixed income security.
An interest rate for govt securities can be computed by subtracting a Short term treasury bill yield from the average yield of long term treasury bonds.
A corporate sector spread can be derived by subtracting the average yield of high grade, short term corporate debt, such as commercial paper, from the average yield of the high grade corporate bonds.
An upward sloping yield curve is bullish for the market. So is positive interest rate spread. The more positive the spread the more favorable is the market environment. If follow that a trend toward a large positive spread is also favourable for the market, as is an accelerating rate if positive improvement.
Based upon this model, the interest rate spread indicator has accurately signaled many periods of rising and falling stock prices.
Whenever the indicator reached a bearish extreme, the market invariably responded by moving sharply lower.
Barron's bond/ stock ratio.
The bond / stock ratio represents an alternative calculation of the basic bond yield- stock yield spread. It is computed by dividing the interest rate yield on Barron's ten high grade bonds by the earnings yielevel Barron's fifty stock average.
It ignore the all important element of future earnings growth.
In 2010-2011, European union bond yield curve has increased high , especially Greece and Spain, by this situation created uncertainty of global economics. So, global stock market affected painfully.
In recently, Indian govt has implemented GST tax reform, after this reform, govt revenue and countries both are suffered highly, while a time PNB scam Al's revealed and currency valuation decrease such event created uncertainty of Indian financial market. Stock market has declined from all time high of 11,170, came down to the 10,000 level.
Bond yield curve and stock market return is in direct related securities.
A yield curve is a relationship between market yields of interest bearing securities of different maturity lengths. Securities maturity time is the date on which the issue of the security. Govt securities maturity length is different.
Treasury bills which mature in less than one year , treasury notes with one to five years and long term treasury bonds prolong up to 20 years.
Normally, the longer the time to the maturity of a security, the higher it's yield. Thus treasury bills usually yield less than treasury bonds. This is called an 'upward sloping" yield curve. The nominal interest rate and interest spread both are impact the yield curve.
Upward sloping
An upward sloping yield curve is normal and is bullish for the stock market. Any deviation from an upward sloping yield curve is bearish. If treasury bill yield more than bonds, because of three reason,
Abnormal need for short term fund
Short term inflationary pressure
Central banks monetary tightness.
All of these situations have bearish implications for stock prices, because liquidity problems , inflationary pressures, and monetary stringency upset the normal day to day course of business, harming companies. Normal upward sloping yield usually precedes and accompanies rising stock prices.
Interest rate spreads
A valuable supplement to the yield curve indicator is the yield curve indicator is the " interest rate spread" which is calculated by subtracting the yield of a short term fixed income security from the yield of a long term, fixed income security.
An interest rate for govt securities can be computed by subtracting a Short term treasury bill yield from the average yield of long term treasury bonds.
A corporate sector spread can be derived by subtracting the average yield of high grade, short term corporate debt, such as commercial paper, from the average yield of the high grade corporate bonds.
An upward sloping yield curve is bullish for the market. So is positive interest rate spread. The more positive the spread the more favorable is the market environment. If follow that a trend toward a large positive spread is also favourable for the market, as is an accelerating rate if positive improvement.
Based upon this model, the interest rate spread indicator has accurately signaled many periods of rising and falling stock prices.
Whenever the indicator reached a bearish extreme, the market invariably responded by moving sharply lower.
Barron's bond/ stock ratio.
The bond / stock ratio represents an alternative calculation of the basic bond yield- stock yield spread. It is computed by dividing the interest rate yield on Barron's ten high grade bonds by the earnings yielevel Barron's fifty stock average.
It ignore the all important element of future earnings growth.
In 2010-2011, European union bond yield curve has increased high , especially Greece and Spain, by this situation created uncertainty of global economics. So, global stock market affected painfully.
In recently, Indian govt has implemented GST tax reform, after this reform, govt revenue and countries both are suffered highly, while a time PNB scam Al's revealed and currency valuation decrease such event created uncertainty of Indian financial market. Stock market has declined from all time high of 11,170, came down to the 10,000 level.
Bond yield curve and stock market return is in direct related securities.
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