US Bonds and Money Market - Yield on 90-Day Bank Accepted Bills-Negotiable Certificates of Deposit - Case Study Example

STUDENT’S NAME: ADMISSION NO: NAME OF THE INSTITUTION: US Bonds and Money Market The yield on 90-day Bank Accepted Bills/Negotiable Certificates of Deposit The 90-day Bank Accepted bills comprising of futures and options are considered by the financial analysts to be the most desirable securities for yielding good interests within a span of short duration in the money market. Based on the fact than the trading window is shorter, the United States under the umbrella of National Securities Commission rely on the 90-day Bank Accepted Futures and options to expand its portfolio at the same time curbing investment risks that may be encountered in the changing securities’ market (Van Blarcom 69-71). According to Diebold and Canlin (339), the financial reporting from the Negotiable Securities Market, the 90-day Bank Accepted futures was rated to have been the most outstanding contract with the most yields in terms of short term interests. Based on the historical data as provided by the US Federal Reserve, will look at the trend of the performance of the treasury bills/Bonds As indicated in the graph above, in the start of the year 2000, the 90 Day Accepted Bank Bills were trading at an interest of 5.88%, as the year progresses, many investors had opted for this contracts since the interest yield was on an upward trend for the 90 Day period. Illustration As seen above, a number of factors may have been responsible for the upward growth in the interest yield from the 90 Day Accepted Bank Bills. Ideally, many investors may have been attracted by the price elasticity and liquidity of the Federal Reserve and thus felt confident to commit their finances in these securities. The yield on 2-year US Government Bonds The Federal Reserve also has those treasury bonds that are normally traded for a span of two calendar years. These among others are normally considered to be long term securities since they tend to tae slightly longer time compared to the 90 Day Accepted Bank Bills before they mature (Balduzzi, Pierluigi & Clifton 527-531). The trend depicts fluctuating pattern in terms of the interest yields realized from the Securities market. This would be due to investors’ resilience in spending their money and thus the Fed find it hard to maintain an upward movement of the yields imposed on the bond The yield on 5-year US Government Bonds As stated by Sherris (115), these are US treasury bonds that are traded in the securities market for moderately longer time compared to the 2 year treasury bonds. They last for approximately five years in the Securities market before they are eventually paid out. The graph above depicts the unpredictable trend of the yields from the 5 year treasury bonds traded in the Securities market. According to the economists, following the aftermath of the 2008 financial crisis that had negatively affected the United States, the interest rate was slightly high to give investors confidence on the state of the economy. The yield on 10-year US Government Bonds These types of treasury bonds take the longest time in the Securities market. According to analysts, these bonds yields higher interest returns than the 5 year treasury bonds. As shown in the graph above the interest yield on the 10 year treasury bonds is much higher in comparison to those of 5-year and 2-year period. Therefore, in order to realize high returns investors should focuss their attention on those treasury bonds that take a longer period of time to mature. The trend of the yield is irregular, however it is notable that in the year 2008 probably due to the financial crisis that was facing the country then, the yields were much lower throughout that year. The yield on Indexed US Government Bonds These are those treasury bonds that the Federal Reserve has imposed some mechanisms to protect them in the event of inflation. They are also known as inflation-linked bonds and are measured based on the consumer price index. The interest rate in these bonds is normally payable twice in a year at a fixed rate. The graph below shows the trend of the 5-year inflation-index treasury bonds as was reported by the Federal Reserve System. The sampled historical data ranges from Jan 2009 to Dec 2013 The graph as depicted above is unpredictable due to the fact that treasury bonds are protected against inflation hence the Fed tries to regulate the interest on these bonds. Conclusion The investors in the Securities market realized increasing yields depending on the duration of their investment in the treasury bonds, that is, those investors who had put their money in the 10 year treasury bonds had the highest returns compared to their counterparts who had opted for 5 year and 2 year treasury bonds, On the other hand, the yield would have been much better if the 2008 financial crisis that had faced the global market was managed amicably. (Count-853) The yield on Australian 90-day Bank Accepted Bills/Negotiable Certificates of Deposit and the yield on equivalent US Bank Accepted Bills/Negotiable Certificates of Deposit Just like the US 90 day Accepted Bank bills, the Australian 90 day Bank Accepted Bills are often regarded as parameter for yielding short term interests to the investors. According to financial analysts, the Australian 90 day Bank Accepted bills recorded over 100.000 contracts in the year ended 2014. The graph below shows the trend of the yields on the Australian 90 day Bank Accepted bills. The data was sampled from the Australian historical data; it ranges from Jan 2000 to March 2000 The yield on these bills at the start of that year was yielding 5.66 % which was increased gradually to 5.80% and finally before close of the trading the yield was standing at 5.89%. When compared to the US 90-day bills, the US 90- day performed much better during that period with a yield of 5.88% during the beginning of that year which arose to above 6%. Therefore, investors ought to have invested more in the US 90 day bills The yield on Australian and US 10-year Government bonds The Reserve Bank of Australian reported the yield below from the trading of their Australian 10-year Government bonds. As indicated above, the yield from the Australian 10 year bond is fluactuating, that is, it is not consistent and thus investors may not predict the next year’s trend. Towards the end of the year 2012, the yield at down significantly compared to other months. In comparison to the US 10 year treasury bonds, the Australian bonds performed slightly low. This is due to the fact that US 10 year treasury arose upto above 5% in the year 2006 while the highest that Australian 10 year bond had risen was below 4%. On the other hand, the yield generated from the US 10 year bond never dropped below 2% as compared to the Australian 10 year bonds that at some point were as low as less than 1% The yield on Australian and US Inflation-Linked bonds Just like the Federal Reserve in the United States, the Reserve Bank of Australia also offers Government that are protected against inflation. These are treasury bonds that are adjusted based on the consumer price index in the Securities market. The coupon interests are often payable after duration of three months unlike the US treasury index bonds that are often payable in a year As shown above, the trend is irregular. The yields on the these kind of bonds never arose beyond 3.5% , this could be based on the fact that these indexed bonds are normally traded in large parcels and thus only a few investors are able to afford them. In comparison to the US 5 year indexed treasury bonds, the Australian bonds performed much better, that is, the highest rate in the US indexed bonds reached 2% while the Australian indexed bonds traded as high as above 3%. Factors affecting the US and Australian Treasury Bonds’ yields in the Securties Market Common Factors The anticipated yields from the treasury bonds/bills are often affected by the global influences, for instance during the 2008 financial crisis, many investors were faced with uncertainties following the collapse of a number of investment banks which affected the securities at a great deal. This in turn affected the yield from the traded bonds thereafter (Van Blarcom 69-71). Different Factors The payable period may hinder the yield of the traded bonds, that is, the indexed treasury bonds offered by the Australian Government is paid after a duration of threee months unlike the US bonds which are only paid out twice in a year (Van Blarcom 69-71). (Count 595) Factors that will affect the future Australian and US Treasury Bonds’ yields from September 2015 to December 2016 Australia The Australian Securities market faces a number of challenges which includes:- Global impact: The Australian Securities are often traded in the US Securities market and due to the US monetary policy in place, the compensation risk that is normally offered to the investors in form of term premium revised and thus driving the investors away since their security was not guaranteed (Sherris 115). Inflation: The deterioriating value of the Australian dollar sometimes had a negative impact on the US Securities market, that is, the traded bonds are paid out at a lower rate than expected (Sherris 115). United States Credit worthiness of the Investor:The inability of the investors to make timely payments of the interest rates and principal amount may affect the maturity duration of the treasury bonds. Maturity term: As reported by the Federal Reserve, during normal trading conditions, the yields on the longer term treasury bonds are often higher than those from shorter term bonds (Balduzzi, Pierluigi & Clifton 533). Risk Management: The investors that anticipate higher yields are often required to take additional risks, these risks will require the Security Exchange Management to compensate them incase of occurrence, therefore the US Government is required to have measures in place with regard to the investors’ safety (Balduzzi, Pierluigi & Clifton 533). . Conclusion:- According to Diebold and Canlin (339), any investor who desires to invest in Australian or US treasury bonds should be conversant with the Security Market conditions in other places such as Europe, Asia and Africa among others. This helps in making informed decision regarding where to invest. Likewise upon the Federal Reserve of US and Reserve Bank of Australia taking into consideration the factors discussed above, the yield from the traded bonds/bills will increase significantly from now henceforth.(Count 270) BIBLIOGRAPHY Balduzzi, Pierluigi, Edwin J. Elton, and T. Clifton Green. "Economic news and bond prices: Evidence from the US Treasury market." Journal of financial and Quantitative analysis 36.04 (2001): 523-543. Brailsford, Tim, John C. Handley, and Krishnan Maheswaran. "Re‐examination of the historical equity risk premium in Australia." Accounting & Finance 48.1 (2008): 73-97. Campbell, John Y., and Glen B. Taksler. Equity volatility and corporate bond yields. No. w8961. National bureau of economic research, 2002. Codogno, Lorenzo, Carlo Favero, and Alessandro Missale. "Yield spreads on EMU government bonds." Economic Policy 18.37 (2003): 503-532. Deacon, Mark, Andrew Derry, and Dariush Mirfendereski. Inflation-indexed securities: bonds, swaps and other derivatives. John Wiley & Sons, 2004. Diebold, Francis X., and Canlin Li. "Forecasting the term structure of government bond yields." Journal of econometrics 130.2 (2006): 337-364. Favero, Carlo, Marco Pagano, and Ernst-Ludwig Von Thadden. "How does liquidity affect government bond yields?." (2010): 107-134. Pflueger, Carolin E., and Luis M. Viceira. An empirical decomposition of risk and liquidity in nominal and inflation-indexed government bonds. National Bureau of Economic Research, 2011. Sherris, Michael. Interest Rates Risk Factors in the Australian Bond Market. Macquarie University. School of Economic and Financial Studies, 1995:113-116 Van Blarcom, Jeff. Wiley Series 63 Exam Review 2015 Test Bank: The Uniform Securities Examination. John Wiley & Sons, 2014:69-71 Read More