Sunday 10 October 2010

News and bond Markets: predicting the effects of ECB comments about IMF on Greece

So Bloomberg has an article where a member of the executive board of the ECB says the IMF may extend the duration of Greece's debt relief package. Now, assuming that bond markets use similar signals as the one forex and libor markets use (ie: the news broadcasted around them), this piece of information should have some effect on the bond markets tommorrow. What I'm going to try to do is to try to guess today and check what happened tomorrow at the end of the day. My idea is that bonds will be trading at fairly low prices at the beginning of the day and will remain so unless some new piece of information arises. The logic is that all that this piece of information says is that Greece is in worst shape than anyone has dared to admit. It doesn't say that the IMF will do it. It says that it is considering it and that it is feasible. Funnily enough this shock to the coupon (or nominal) yield will push them so high that it might in the end fulfil the prophecy that Greece does indeed need more time to deal with this situation, simply by making the short run more unbearable for Greek bonds. As the miserable state of the Greek economy is made clearer to investors, prices will decrease and the nominal (coupon) yields of its bonds will rise until Greece's medium term access to credit is made clear, at which point if there ate no other news of relevance, things should calm down. Let's see if that's what happens or if I'm just full of it...

1 comment:

  1. According to the FT, at
    http://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=GOV-111010

    the yield change for the day was +9.2%, which implies that the price went down, assuming that that yield "Y" is calculated as:
    Y=(Coupon)/(Bid-Price)

    So I seem to have been wrong. Markets either didn't read anything into the news of possible IMF debt scheme extension , or better they figured that the ECB executive director's comment was a good sign that the IMF would indeed intervene, and thus that prices would decrease in the future. This would have given them a good reason to buy now, when it's cheap, before everyone else starts doing so.

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