This sure isn’t just going to be boulevard of broken dreams. SEBI/RBI is finally going to introduce credit derivatives in the Indian debt markets (well a circular / draft has been issued to that effect). It is one among several definite steps undertaken by RBI as India moves towards CAC (Capital Account Convertibility). RBI had recently introduced an analogous concept in the lines of MTNs (Medium Term Notes) in the US.
However, one question still needs to be addressed. Are the Indian debt markets broad enough to sustain and develop CDS instruments? The market and liquidity for corporate bonds in India is still very thin. Given the fact that latest fetish for the corporate houses are ECBs (External Commercial Borrowings). This is done by leveraging the low yields in the developed western countries where the yields are low as compared to the Indian scenario of 8%. Than there are the more innovative instruments called FFCBs (Foreign Currency Convertible Bonds). Given the appreciating rupee, FFCBs are also becoming more cost effective and a darling of India Inc.
RBI still needs to stimulate the corporate debt market before CDS can be successful in India. Till than CDS will be like premature baby in the Indian capital markets.
How can this be done?
- Encourage borrowings from domestic markets – this will also mope up the intemperance liquidity from the system – reduce strain on RBI (Buying $ leads to increase in money supply – RBI than issues MSS to mope up excess rupee in the system – now given the limit on MSS at 100,000 crores and 3000 crores for reverse repo RBI will be forced to use unproductive measures like the CRR)
- FFCBs and ECBs should be used only for foreign exposures and global M&A activities (thwart excess $ getting into Indian markets – prevent rupee appreciation and maintain it at a more manageable levels)
There are two pronged benefits of these. First, it is a positive step towards developing the debt markets. And the second, it also addresses the current tribulations of excess dollars flowing into the Indian economy and fueling rupee appreciation and inflation (which currently is under control – not likely to sustain if the inflow of dollar continues).
After all the hooplas of the equity markets, this sure is going to be the next big thing to watch out for. Till than its wait and watch for the Indian investors in the bond markets. As the old saying goes: ‘sometimes it takes time for all the good things to come –‘
Note – CDS instruments do exist on Indian bonds issued by corporates like Reliance, TATA etc. however, they are issued on dollar denominated bonds issued in the global markets.
Tuesday, July 31, 2007
Wednesday, July 25, 2007
US Bond Market Outlook for 2008 and beyond –
The year 2006 was in interesting year to go by. And so 2007 seems to follow the same theme, the buccaneers of change and multitude of events that shape the financial districts of the globe. The increase in global M&A activity (most notably Leveraged Buy Outs) have led to considerable increase in the bond market liquidity and depth. The high liquidity in the markets has also helped in increasing bond market activity. With the hope that companies being LBO’ed (pronounced elbowed) will finance the deal and help in repayment of debt and service the interest liability of the deal; one interesting thing that showed up on a research paper by a prominent investment bank was that after an LBO the sponsorer of the buyout (mostly PE firms) issue more debt to increase the dividend payout for its investors. If this is really true than we have a problem. And that a big one too. Now I don’t want to sound like a harbinger of distress, but it’s only a matter of time when all the dominoes start to fall.
The benign growth in the US economy and increasing profits has reduced the spreads of junk bonds over the treasuries. And also the CDS spreads have been on the fall. Are the investors neglecting the risk?? The inverted yield curve of US tells us another story. The inverted yield curve which shows that the economy is heading into recession was a false signal. If we look at the recent trends in the CDX index, we will see that the spreads have stared to widen. And the main reason attributed to it is the recent CDOgate. The delinquencies in the mortgage and related derivatives markets have added supplementary jet fuel to the fire.
The reason for falling spreads was that reducing risks premiums and growth in the emerging economies. Yields in the USTs were very low, and what better place to reap higher yields than emerging economies growing at around 10% a fiscal. Strong fundamentals, supporting currencies and higher yields as compared to the G8 nations resulted in higher FIIs for Emerging Economies.
However, one interesting fact to note is the reverse funneling hypothesis – where by the emerging economies have been finding the increasing fiscal and budgetary deficit (twin deficit) of US. This has been the driving factor for preventing the economy in going into recession.
The FED has increased the interest rates for consecutive 17 times by 25 bips over the past 5 years. Now the economy is on short finals for a soft landing. The fall in real estates prices and depreciating dollar has led to analysts discount a fall in the fed rates that is now at 5.25%
The increased LBO activity is not going to last long. Once the liquidity in the market has dries up and the risk premium spreads starts to widen, the default rates in the junks will increase. And the markets will fall like a pack of cards. Now I don’t want to sound like a harbinger of distress, but the fact is that the economy has stretched out too thin. To collaborate this we look at the VIX index and the XO index (crossover index). The index has shown a significant growth in volatility in recent period, mainly due to sub prime delinquencies.
The demand of dollar and USTs will reduce once the petrodollars find its way into emerging economies and alternative investments. This will have a negative impact on the US economy and will have a cascading effect on the global economy. However, looking at the depreciating dollar against all the major currencies, and simultaneously the growth in E8 economies, we clearly see that dependence on US is reducing. We can’t totally ignore US economy though. It still is the cue for the global markets.
After Bank of England increased interest rates to match US with 5.25% and further to 5.75% in the last BOE meeting, over inflation and runway £, the investments have shifted from US to UK. This has again put pressure on the US yield curve. The fed has only two solutions. First wait and watch and the second is preferential reduction the interest rates in the next quarter review.
The benign growth in the US economy and increasing profits has reduced the spreads of junk bonds over the treasuries. And also the CDS spreads have been on the fall. Are the investors neglecting the risk?? The inverted yield curve of US tells us another story. The inverted yield curve which shows that the economy is heading into recession was a false signal. If we look at the recent trends in the CDX index, we will see that the spreads have stared to widen. And the main reason attributed to it is the recent CDOgate. The delinquencies in the mortgage and related derivatives markets have added supplementary jet fuel to the fire.
The reason for falling spreads was that reducing risks premiums and growth in the emerging economies. Yields in the USTs were very low, and what better place to reap higher yields than emerging economies growing at around 10% a fiscal. Strong fundamentals, supporting currencies and higher yields as compared to the G8 nations resulted in higher FIIs for Emerging Economies.
However, one interesting fact to note is the reverse funneling hypothesis – where by the emerging economies have been finding the increasing fiscal and budgetary deficit (twin deficit) of US. This has been the driving factor for preventing the economy in going into recession.
The FED has increased the interest rates for consecutive 17 times by 25 bips over the past 5 years. Now the economy is on short finals for a soft landing. The fall in real estates prices and depreciating dollar has led to analysts discount a fall in the fed rates that is now at 5.25%
The increased LBO activity is not going to last long. Once the liquidity in the market has dries up and the risk premium spreads starts to widen, the default rates in the junks will increase. And the markets will fall like a pack of cards. Now I don’t want to sound like a harbinger of distress, but the fact is that the economy has stretched out too thin. To collaborate this we look at the VIX index and the XO index (crossover index). The index has shown a significant growth in volatility in recent period, mainly due to sub prime delinquencies.
The demand of dollar and USTs will reduce once the petrodollars find its way into emerging economies and alternative investments. This will have a negative impact on the US economy and will have a cascading effect on the global economy. However, looking at the depreciating dollar against all the major currencies, and simultaneously the growth in E8 economies, we clearly see that dependence on US is reducing. We can’t totally ignore US economy though. It still is the cue for the global markets.
After Bank of England increased interest rates to match US with 5.25% and further to 5.75% in the last BOE meeting, over inflation and runway £, the investments have shifted from US to UK. This has again put pressure on the US yield curve. The fed has only two solutions. First wait and watch and the second is preferential reduction the interest rates in the next quarter review.
Friday, July 20, 2007
Charlie Alpha cleared to land runway 14R, winds 14 kts SE
some of the most difficult and beautiful approaches in the world... boy! i wish i was on short finals and cleared to land!! one day... perhaps... someday...
Thursday, July 19, 2007
Bullseye
0.999… is the same as 1. Not just very close, but precisely identical:
a = 0.999…
10a = 9.999…
10a - a = 9.999… - 0.999…
9a = 9
a = 1
There's no trick here. It's just a mathematical fact that most people find deeply counterintuitive.
a = 0.999…
10a = 9.999…
10a - a = 9.999… - 0.999…
9a = 9
a = 1
There's no trick here. It's just a mathematical fact that most people find deeply counterintuitive.
Proof That 2 Equals 1
a = b
a2 = ab
a2 - b2 = ab - b2
(a - b)(a + b) = b(a - b)
a + b = b
b + b = b
2b = b
2 = 1
a2 = ab
a2 - b2 = ab - b2
(a - b)(a + b) = b(a - b)
a + b = b
b + b = b
2b = b
2 = 1
sqrt of a no > no itself???
Can a number’s square root be greater than the number itself??? Hard to believe but it’s true. Check it out…
Take any number such that 1>x>0
Calculate the square root of x (it will be greater than x)
x ----------(x)^(1/2)
0.10 -------0.32
0.20 -------0.45
0.30 -------0.55
0.40 -------0.63
0.50 -------0.71
0.60 -------0.77
0.70 -------0.84
0.80 -------0.89
0.90 -------0.95
1.00 -------1.00
Take any number such that 1>x>0
Calculate the square root of x (it will be greater than x)
x ----------(x)^(1/2)
0.10 -------0.32
0.20 -------0.45
0.30 -------0.55
0.40 -------0.63
0.50 -------0.71
0.60 -------0.77
0.70 -------0.84
0.80 -------0.89
0.90 -------0.95
1.00 -------1.00
Wednesday, July 18, 2007
- Be thankful for problems. If they were less difficult, someone with less ability might have your job.....
- There are people who make things happen, there are people who watch things happen, and there are people who wonder what happened. To be successful, you need to be a person who makes things happen.
Tuesday, July 17, 2007
Modelling... &$^@#$^
the world is not enough..
Demoiselles and danger
Beckons you to enter his web of sin
To fatal sounds of broken dreams
Save the darkness, let it never fade away
For your eyes only
You used to say live and let live
His eye may be on you or me
His needs are more so he gives less
Unlike men, the diamonds linger
But like heaven above me the spy who loved me
Please don't bet that you'll ever escape me
I know that you are only a kiss away
No one ever died from wanting too much
Now I've got you in my sight
We need nothing more
So hold on tight,
let the flight begin
Beckons you to enter his web of sin
To fatal sounds of broken dreams
Save the darkness, let it never fade away
For your eyes only
You used to say live and let live
His eye may be on you or me
His needs are more so he gives less
Unlike men, the diamonds linger
But like heaven above me the spy who loved me
Please don't bet that you'll ever escape me
I know that you are only a kiss away
No one ever died from wanting too much
Now I've got you in my sight
We need nothing more
So hold on tight,
let the flight begin
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