Profitable Insights into Financial Markets
Check out the updated IPython Notebook where I take a look at changes and trends in ETF valuations using the Implied Cost of Capital model. To learn more about the model and the methodology used see here and here.
For reference here is a Table of Contents, but due to some technical issues the TOC is not working properly on the nbviewer.org page. I'll keep working to fix it for the next issue.
Check out my updated IPython Notebook where I take a look at changes and trends in ETF valuations using the Implied Cost of Capital model. To learn more about the model and the methodology used see here and here.
Check out my updated IPython Notebook where I take a look at changes and trends in ETF valuations using the Implied Cost of Capital model. To learn more about the model and the methodology used see here and here.
Global bond market volatility was at a relative extreme this week. Following the markets you would see headlines like this:
The basic premise being that the world is awash in liquidity and as a result of the prices of government bonds, investment grade bonds (IG), and high yield (HY), have been bid so heavily that the yields of these instruments no longer reflect the credit and/or currency risks associated with the issues.
Of particular interest to me was the relentless selling in USD based assets especially treasuries.
$TYX=30 year, $TNX=10 year, $FVX=5 year, $UST2Y=2 year
As an investor the question became "Is this the beginning of a new trend or a false (counter) trend within the larger trend?". To answer questions like these I try simplify the logic.
http://online.wsj.com/mdc/public/page/2_3022-govtbonds.html
Currently examining the chart only Portugal, and Australia are offering better yields than the US 10 year. Clearly risk is being artificially repriced according to central bank machinations. Keep in mind Eurozone member bonds were priced for default within the last 24 months. Now government bonds in Spain and Italy are priced as if they represent better credit risk than the US! That's pure foolishness.
As a fixed income portfolio manager you can't find a better setup. As a result it is my belief that the previous sell-off in global bond markets represented more rotational and risk management behavior as opposed to a new trend. Again, put yourself in a fixed income PM's shoes. You have a multi-billion dollar bond portfolio to manage, your options are limited in terms of investable markets. The best credit risk in the world (USD) is yielding higher than 80% of your available options. On a relative basis you better believe there will be a bid under treasuries as long as the current capital market framework is in place.
Examining the % change in yields of US treasuries from their Wednesday highs to Friday's close, it appears as if portfolio managers were moving to the shorter end of the curve as the 2, 5, 10 year all outperformed the 30 year.
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
This post is part of a series examining the ICC model's use as a valuation tool. I first introduced the topic in this post, where I outlined the following:
Recently I expanded on the subject by detailing the Python code I use to run the analysis along with my interpretations of the output from the model. For detailed coding/quant analysis I will be using the IPython Notebook and NBviewer to distribute and share the code. Unfortunately, Squarespace.com (my current host) doesn't have a good way to show the IPython notebook, so I will post the link to my research with a screenshot below. Take a look and as always I can be contacted @blackarbsCEO for feedback.
AFFILIATE LINK
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