Transcript Yield Spreads, Value of Bonds, and Implications for Liquidity
Slide 1
Faculty of Business Administration and Economics
Yield Spreads, Value of Bonds, and
Implications for Liquidity Management
Prof. Dr. Mario Strassberger
Finance and Financial Services
Conference “International Competition in Banking: Theory and Practice”
May 24-25, 2012, Ukrainian Academy of Banking, Sumy
May 24, 2012
Slide 1
Slide 2
Structure of the Talk
1
2
3
4
May 24, 2012
Introduction
Design and Data
Results
Conclusion
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 2
Slide 3
1 Introduction
Bond portfolios in financial institutes
- Means of liquidity reserve
- Assuring refinancing with the Central Bank, i.e. ECB
Considerable losses to the value of bond portfolios during the crisis
Requirements and recommendations for liquidity risk of the banking
supervision (Basel Committee 2008, 2009; CEBS 2008)
One of the key demands: Maintenance of an adequate level of liquidity
What dos “adequate” mean?
Reliable estimation of haircuts on bond values
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 3
Slide 4
2 Design and Data
(1)
Bloomberg Fair Market Curves™
- Sector: EUR Composite
- Credit qualities: AAA, AA, A and BBB
- Maturities: 1Y, 3Y, 5Y, 7Y, 10Y, 15Y and 20Y
- Benchmark: Government Curve
Two data sets
- Jan 04 – Jul 07 (Set 1, 1,308 observations)
- Aug 07 – Dec 10 (Set 2, 1,249 observations)
Yield spread s t at time t
s t rt
May 24, 2012
comp
rt
gov
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 4
Slide 5
2 Design and Data
(2)
Example of time series
Yields at maturity 1Y
Gov
AAA
AA
A
BBB
7,00
6,00
5,00
4,00
3,00
2,00
1,00
May 24, 2012
01.11.2008
01.09.2008
01.07.2008
01.05.2008
01.03.2008
01.01.2008
01.11.2007
01.09.2007
01.07.2007
01.05.2007
01.03.2007
01.01.2007
0,00
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 5
Slide 6
2 Design and Data
(3)
Example of time series
Yield spreads at maturity 1Y
BBB
A
AA
AAA
4,50
4,00
3,50
3,00
2,50
2,00
1,50
1,00
0,50
May 24, 2012
01.11.2008
01.09.2008
01.07.2008
01.05.2008
01.03.2008
01.01.2008
01.11.2007
01.09.2007
01.07.2007
01.05.2007
01.03.2007
01.01.2007
0,00
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 6
Slide 7
2 Design and Data
(4)
exp
1) Estimating exp. spreads s t
and p-quantiles of the spread distr. (Set 1)
Identifying max. observed spreads s tmax (Set 2)
2) Calculating relative changes in Present Value PV t of zero bonds
caused by spread expansions
PV t
exp
1
1 rtgov
PV t
exp t
st
max
1
1 rtgov
max
st
t
and interpreting as haircut
Ht
May 24, 2012
PV t
max
PV t
PV t
exp
exp
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 7
Slide 8
3 Results
(1)
Considering Set 1
Table 1 Expected yield spreads in basis points
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
12.14
16.81
18.94
18.59
21.36
20.10
31.36
AA
17.08
24.03
25.38
25.28
29.85
35.61
42.32
A
23.72
34.41
39.00
40.72
48.86
59.77
67.92
BBB
38.25
57.39
70.93
78.87
94.61
110.20
132.63
Table 2 99.99%-quantile of the yield spread distributions in basis points
May 24, 2012
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
26.86
23.41
32.46
30.13
40.19
36.92
49.96
AA
32.10
38.60
45.56
43.01
52.72
52.11
79.65
A
43.73
52.44
62.05
60.61
77.52
99.78
105.08
BBB
81.49
105.69
116.76
111.51
129.35
170.48
260.66
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 8
Slide 9
3 Results
(2)
Considering Set 2
Table 3 Maximum observed yield spreads in basis points
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
200.60
156.50
299.40
144.10
142.90
121.90
75.20
AA
215.60
174.80
320.90
183.70
195.00
144.65
137.98
A
285.00
267.80
335.20
265.00
272.00
266.40
214.90
BBB
391.08
398.50
412.60
432.20
461.20
403.30
444.40
Spreads up to 13 times higher than expected (regular market cond.)
Increase in spreads mainly driven by liquidity premiums
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 9
Slide 10
3 Results
(3)
Empirical frequency of yield spreads (AAA, 1Y)
900
120,00%
800
100,00%
700
600
80,00%
500
60,00%
400
300
40,00%
200
20,00%
100
0
May 24, 2012
,00%
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 10
Slide 11
3 Results
(4)
Calculated haircuts
Table 4 Haircuts on zero bonds in %
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
-1.04
-2.55
-8.91
-5.96
-8.40
-10.37
-6.01
AA
-1.09
-2.75
-9.36
-7.45
-11.22
-11.05
-12.62
A
-1.43
-4.21
-9.37
-10.35
-14.81
-19.80
-18.65
BBB
-1.92
-6.07
-10.69
-15.72
-22.98
-26.73
-35.17
Haircuts of up to 25% for investment grade bonds
Ex ante underestimation of spreads and haircuts (regular market cond.)
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 11
Slide 12
4 Conclusion
Maintaining an adequate level if liquidity
holding portfolios of liquid securities
+ individual additional charge on liquidity reserve
(up to 1/3 more in present value than needed to assure liquidity)
Increasing importance to minimise estimation errors of bond haircuts
Liquidity shock could persist for several months
Additional discount on actual market value to ex ante account for a crisis
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 12
Faculty of Business Administration and Economics
Yield Spreads, Value of Bonds, and
Implications for Liquidity Management
Prof. Dr. Mario Strassberger
Finance and Financial Services
Conference “International Competition in Banking: Theory and Practice”
May 24-25, 2012, Ukrainian Academy of Banking, Sumy
May 24, 2012
Slide 1
Slide 2
Structure of the Talk
1
2
3
4
May 24, 2012
Introduction
Design and Data
Results
Conclusion
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 2
Slide 3
1 Introduction
Bond portfolios in financial institutes
- Means of liquidity reserve
- Assuring refinancing with the Central Bank, i.e. ECB
Considerable losses to the value of bond portfolios during the crisis
Requirements and recommendations for liquidity risk of the banking
supervision (Basel Committee 2008, 2009; CEBS 2008)
One of the key demands: Maintenance of an adequate level of liquidity
What dos “adequate” mean?
Reliable estimation of haircuts on bond values
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 3
Slide 4
2 Design and Data
(1)
Bloomberg Fair Market Curves™
- Sector: EUR Composite
- Credit qualities: AAA, AA, A and BBB
- Maturities: 1Y, 3Y, 5Y, 7Y, 10Y, 15Y and 20Y
- Benchmark: Government Curve
Two data sets
- Jan 04 – Jul 07 (Set 1, 1,308 observations)
- Aug 07 – Dec 10 (Set 2, 1,249 observations)
Yield spread s t at time t
s t rt
May 24, 2012
comp
rt
gov
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 4
Slide 5
2 Design and Data
(2)
Example of time series
Yields at maturity 1Y
Gov
AAA
AA
A
BBB
7,00
6,00
5,00
4,00
3,00
2,00
1,00
May 24, 2012
01.11.2008
01.09.2008
01.07.2008
01.05.2008
01.03.2008
01.01.2008
01.11.2007
01.09.2007
01.07.2007
01.05.2007
01.03.2007
01.01.2007
0,00
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 5
Slide 6
2 Design and Data
(3)
Example of time series
Yield spreads at maturity 1Y
BBB
A
AA
AAA
4,50
4,00
3,50
3,00
2,50
2,00
1,50
1,00
0,50
May 24, 2012
01.11.2008
01.09.2008
01.07.2008
01.05.2008
01.03.2008
01.01.2008
01.11.2007
01.09.2007
01.07.2007
01.05.2007
01.03.2007
01.01.2007
0,00
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 6
Slide 7
2 Design and Data
(4)
exp
1) Estimating exp. spreads s t
and p-quantiles of the spread distr. (Set 1)
Identifying max. observed spreads s tmax (Set 2)
2) Calculating relative changes in Present Value PV t of zero bonds
caused by spread expansions
PV t
exp
1
1 rtgov
PV t
exp t
st
max
1
1 rtgov
max
st
t
and interpreting as haircut
Ht
May 24, 2012
PV t
max
PV t
PV t
exp
exp
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 7
Slide 8
3 Results
(1)
Considering Set 1
Table 1 Expected yield spreads in basis points
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
12.14
16.81
18.94
18.59
21.36
20.10
31.36
AA
17.08
24.03
25.38
25.28
29.85
35.61
42.32
A
23.72
34.41
39.00
40.72
48.86
59.77
67.92
BBB
38.25
57.39
70.93
78.87
94.61
110.20
132.63
Table 2 99.99%-quantile of the yield spread distributions in basis points
May 24, 2012
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
26.86
23.41
32.46
30.13
40.19
36.92
49.96
AA
32.10
38.60
45.56
43.01
52.72
52.11
79.65
A
43.73
52.44
62.05
60.61
77.52
99.78
105.08
BBB
81.49
105.69
116.76
111.51
129.35
170.48
260.66
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 8
Slide 9
3 Results
(2)
Considering Set 2
Table 3 Maximum observed yield spreads in basis points
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
200.60
156.50
299.40
144.10
142.90
121.90
75.20
AA
215.60
174.80
320.90
183.70
195.00
144.65
137.98
A
285.00
267.80
335.20
265.00
272.00
266.40
214.90
BBB
391.08
398.50
412.60
432.20
461.20
403.30
444.40
Spreads up to 13 times higher than expected (regular market cond.)
Increase in spreads mainly driven by liquidity premiums
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 9
Slide 10
3 Results
(3)
Empirical frequency of yield spreads (AAA, 1Y)
900
120,00%
800
100,00%
700
600
80,00%
500
60,00%
400
300
40,00%
200
20,00%
100
0
May 24, 2012
,00%
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 10
Slide 11
3 Results
(4)
Calculated haircuts
Table 4 Haircuts on zero bonds in %
1Y
3Y
5Y
7Y
10Y
15Y
20Y
AAA
-1.04
-2.55
-8.91
-5.96
-8.40
-10.37
-6.01
AA
-1.09
-2.75
-9.36
-7.45
-11.22
-11.05
-12.62
A
-1.43
-4.21
-9.37
-10.35
-14.81
-19.80
-18.65
BBB
-1.92
-6.07
-10.69
-15.72
-22.98
-26.73
-35.17
Haircuts of up to 25% for investment grade bonds
Ex ante underestimation of spreads and haircuts (regular market cond.)
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 11
Slide 12
4 Conclusion
Maintaining an adequate level if liquidity
holding portfolios of liquid securities
+ individual additional charge on liquidity reserve
(up to 1/3 more in present value than needed to assure liquidity)
Increasing importance to minimise estimation errors of bond haircuts
Liquidity shock could persist for several months
Additional discount on actual market value to ex ante account for a crisis
May 24, 2012
Prof. Dr. Mario Straßberger, Yield Spreads, Bond Values, and Implications
Slide 12