Guide to Bond Market Indicators and Their Significance
When it comes to gauging areas of the financial market for viability, none seem to be more reliable than the bond market. This is due to the predictable nature of cash flows and the presence of a lot of smart people scouring the space in search of opportunity, and difficulty, which are used to predict trouble early on. As for what exactly zeros them in on what's going on, that comes in several indicators they look for.
Below is a look at said indicators, and what they signify. In addition to this, let’s check at the technical analysis used to access the relevant valuable data.
Contents:
- Bond indicators: main points
- Bond yield movements
- Yield curves
- Credit ratings
- Credit spreads
- Data's role in all of this
- Final thoughts
Bond indicators: main points
As alluded to earlier, bond market indicators are qualitative tools used to translate financial data, for forecasting. When it comes to bonds, there are a few worth noting, and they are as follows:
- Bond yield movements
- Yield curves
- Credit ratings
- Credit spreads
So, what exactly would you be looking for when attempting to use these indicators? Well, let's look at each one closely to help understand them:
Bond yield movements
These are the total return on a bond as a proportion of its current price, and as such, they represent how the security is viewed by the market. Based on how long the money is being held, the expected yields will be less, the shorter the term, and the same is true for the level of risk, with higher risks coming with equal expectations.
For these fixed-income securities, if their price rises, the yield falls, and vice versa. If they are in the bigger picture, chances are that investors are marking them down, often a sign that they sense something, which could be rising interest rates.
Yield curves
These are lines that show the interest rates at set points in time at which bonds had equal credit quality, but different dates of maturity. Typically the yields at the short end should be lower than those in the middle and at the long side, and thus, an upward sloping line.
However, when the yields on the short end begin to equal those on the rest of the line, causing it to flatten, it's usually a sign of trouble, which is only compounded when the line inverts, typically a sign of a recession. It was a similar curve that predicted the 2008 crisis, as well as others.
Credit ratings
These show how creditworthy a bond is. The agencies that issue them such as the Fitch agency typically have ratings ranging from AAA, which is the best rating, and D, which is the opposite. The higher the rating, the lower the risk, and yield expectations are lower. If they start getting downgraded, chances are that you should be aware of possible trouble, although they are merely opinions that aren't always accurate, as they didn't predict the aforementioned 2008 crisis.
Credit spreads
These show the gap between safer and riskier spreads. A closer gap shows that there's more of a likelihood to hold, whereas larger gaps show that the higher bond is far riskier, and holding is less likely.
Data's role in all of this
While data has played a role in the financial market for a long time, its place in the bond market has only continually improved as time has progressed. For example, the yield curve that predicted the 2008 crisis is often used as a bit of historical data that was used to foresee the events of 2020.
What takes this over the edge is the latest technology that has been applied to space. These include the likes of the following:
- Machine learning and artificial intelligence
- Big data analytics
- Cloud computing
- Application Programming Interfaces (APIs)
The above technology, along with other data sources such as social media, and the above indicators, allow interested parties to get an even fuller picture of the bond market. This becomes useful in many ways beyond just getting a better understanding of the indicators by providing accurate, comprehensive data, it also allows for keeping up with trends such as ESG.
Then, there are the issues of compliance and reporting. These too, will require the advanced tools listed above, otherwise, chances of fines, and being criminally liable increase.
Final thoughts
The indicators discussed above are beyond important in this field on a much larger scale and are typically looked at even more than their equities counterparts. Each of them working in conjunction with the other allows for a greater picture of what could happen. That said, they're only useful if the data is accurate, and in today’s reality, gathering and analyzing information are only possible with advanced tools.
So, always consider the above as you're making your analysis. Know what each indicator entails, and have the additional data, and tools to help sort it out.
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