Bloomberg Functions

1. Credit Risks

-Bond prices today reflect beliefs on repayment likelihood tomorrow: if you expect the borrower to default before maturity then you would pay a lower price *HOWEVER, the assumption when calculating bond yields is that the income is truly fixed and that the full repayment amounts will materialize. -Therefore, notwithstanding your fears about the solvency of the borrower, when it comes to calculating the yield, you assume that you will get the same cash for a lower price thus resulting in an increased yield. *THIS IS WHY WHEN BOND INVESTORS (LENDERS) BEGIN TO DOUBT THE CREDIT WORTHINESS OF A BORROWER, YIELDS BEGIN TO MOVE SHARPLY UPWARDS

FXFC

-Displays foreign exchange rate forecasts

Foreign Exchange (FX or Forex) Market

-The US$ equivalent of $5 trillion of currencies are traded per day 1971 marked the dawn of the modern currency market The US$ is the world's reserve currency and it is the most liquid currency

1. The Quarterly GDP Report

-The quarterly GDP report contains the GDP Price Deflator which is the most authoritative number as it is based on the whole economy -GDP is released every quarter, a month after the end of the quarter -Because GDP is announced quarterly and other economic indicators are published monthly, GDP reports tend to "yesterday's news"

Steep Upward-Sloping Yield Curve

-The short end is trapped in the present as it is controlled by the Fed Funds Rate, but the long-end is not and it is controlled by future beliefs about inflation and interest rates -Upward sloping indicates that bond traders believe that inflation and interest rates will increase in the future as a result of an anticipated economic boom This shape of a yield curve is a classic sign of an accelerating economy As the economy improves, bond traders think rates will go up to rein in inflation and so they sell long-term bonds in anticipation of price declines. Prices decrease, yields increase, and the curve steepens.

Nonfarm Payrolls

-The unemployment report Economic indicator published monthly on the first Friday of the following month

Yield

-the main input to calculating a bond's yield is its price and this fluctuates regularly -the other input is whatever bond repayments are yet to happen in the future. Over time, as the bond gets repaid, the amount of remaining repayments decreases. These remaining repayments along with the floating price of the bond are used together to calculate the yield. **Yields are used to make bonds comparable **Yields facilitate bond valuation ***All that a bond yield is is an equivalent interest rate on a bank account that would provide the same summed amount of interest + principal upon maturity *A BOND YIELD IS THE INTEREST RATE ON AN EQUIVALENT BANK ACCOUNT FOR THE DURATION OF THE BOND ASSUMING THAT THE COUPON PAYMENTS ARE REINVESTED AT THAT RATE

Why do companies borrow in the corporate bond market (2)?

1. A discrepancy in tax treatment means that debt repayments lower a company's tax bill by reducing their pre-tax profits through interest payments. As there is a corporation tax on profits over 20% in many advanced economies, being financed with debt saves a company money. 2. Companies can borrow money for longer terms from the bond market than from banks, which are not typically keen on making long-term loans to corporations

Central Bank Toolkit (2)

1. Adjusting Short-term interest rates 2. Public Statements about interest rate policy

Bond Valuation Summary (6)

1. Bond yields facilitate comparisons between bonds by calculating what an equivalent bank deposit rate would be for the duration of the bond 2. The 3 biggest risks facing bond holders are the borrower not paying you back, having inflation eat into the repayments, and a rise in interest rates pushing down the price of the bond 3. The see-saw relationship between prices and yields instills discipline in governments because investor worries about not getting paid back makes future borrowing more expensive for less-creditworthy governments 4. Short-term borrowers tend to be charged lower interest rates but the risk is that those rates can increase when they roll over the debt 5. Inflation is corrosive to bondholders as it diminishes the purchasing power of the repayments. It therefore sends bond prices down and bond yields up. 6. US government bonds are admired for their lack of credit risk. Therefore, all other bonds have to be price competitively with US government bonds

Drivers of Bond Yields (2)

1. Credit Risks 2. Macroeconomic Drivers

Top 5 Core Economic Indicators

1. Economic Growth 2. Inflation 3. Unemployment 4. Business Confidence 5. Housing

3 Main Entities that Trade Currencies

1. Financial Investors (45% of volume) 2. Corporations 3. Travelers

Inflation Measures Used by Central Banks (3)

1. GDP Deflator -Released quarterly in the GDP report 2. CPI -Released monthly 3. Core Personal Consumer Expenditure -"Favorite" metric used by the Fed **However, all of these measures are HISTORIC measures thus making it difficult to predict future inflation rates **This is why TIPS are so useful

Fixed Income - Topics Covered (5)

1. How the bond market came into being 2. Key factors that drive bond prices 3. The role of central bankers in setting interest rates 4. An overview of the yield curve 5. How and why the yield curve moves

Fixed Income - Key Takeaways (5)

1. Increased government spending and borrowing has driven growth in fixed income. Governments running deficits are beholden to the bond markets. 2. Poor creditworthiness, high inflation, and rising interest rates all send bond prices lower and bond yields higher. Inflation is public enemy number one to bond investors as it erodes the value of fixed repayments. 3. Central banks manipulate interest rate expectations to avoid vicious cycles of inflation and deflation. 4. By setting interest rates, central banks influence governments, businesses, and consumers via the yield curve and its grip on the cost of borrowing 5. As the left-hand end of the yield curve is set by the central bank and the right-hand end shows beliefs about the future, the slope reveals the direction in which the central bank is attempting to nudge the economy.

Long-term Yield Drivers (What drives the yield of the 30-year bonds on the far right side of the yield curve?)

1. Interest Rate Forecasts 2. Long-term GDP Growth Estimates 3. Demographics 4. Demand for long-term borrowing 5. Supply of long-term lending 6. Inflation Expectations (most important factors since inflation corrodes bonds prices)

Module 1 - Economic Indicators - Key Takeaways (3)

1. Real GDP growth is the main yardstick of economic health. The indicators linked to real GDP growth therefore attract the most attention. 2. Because GDP takes so long to calculate, investors fixate on related statistics that are released sooner. These move markets more strongly than GDP reports 3. Economic forecasts are foundational to many financial models and therefore investors need to pay attention when the outlook changes. In some cases, interpretation of these statistics can lead to profitable trading opportunities

3 Main Currency Drivers

1. Surprise Changes in Interest Rates 2. Surprise Changes in Inflation 3. Surprise Changes in Trade

2 Primary sources of Inflation data in the U.S.

1. The Quarterly GDP Report 2. The Monthly CPI

Module 2 - Currency - Key Takeaways (4)

1. The modern currency regime began in 1971 with the US$ at its center. 85% of all trades involve the US$ and while most currencies float freely, some are pegged, but we now appreciate that pegs don't always work 2. In the long-term, currency values are driven by "the law of one price" but in the short-term currency values are driven by surprises in the levels of: interest rates, inflation, and trade 3. Central banks are the guardians of currency valuations, and the primary goal of most central banks is to keep a lid on inflation. Most developed economies target 2% inflation. 4. Currency movements can diminish investment returns. Investors look to currency futures and estimates to gauge the risk they are running on foreign investments. Investors and businesses use forward agreements to lock in currency exchange rates over their investment horizon

Inverted Yield Curve

After Bernanke halted interest rate hikes in 2006, bond investors believed that he would cut rates and therefore they bought medium and long-term bonds that benefit from a cut in rates - this action by bond investors inverted the yield curve as the increased demand for these bonds drove the price higher thus reducing their yields An inverted yield curve indicates that investors are ignoring inflation concerns and heavily buying long-term bonds in anticipation of rate cuts -If the economy is in very poor shape, bond traders may push the long end down so much that the curve becomes downward sloping - an indicator of an impending recession

1. Surprise Changes in Interest Rates

All else equal, a surprise rise in interest rates in one country relative to another country will cause the currency of the first country to strengthen. This is because in order to buy the bonds of the country with the appealing interest rate an investor must first exchange his currency for the currency of that country

The Output Gap

Another inflation gauge (Expressed as a %) Output Gap % = (Actual Output $ - Potential Output $) / Potential Output $ -The difference between an economy's potential output and its actual output. Tightness in the economy coincides with inflation and vice versa. Tightness means that actual output exceeds potential output and thus indicates potential future inflation Slack means that actual output is less than potential output and thus indicates potential future deflation

a. Short-term Interest Rates

As interest rates rise and fall in one country, the prices of its bonds and thus yields on those bonds change -This causes price competition where countries will either increase or decrease the prices of their bonds in order to ensure that the yields on their bonds remain competitive and attractive to investors

WBG

Big Mac Index -Identifies potentially overvalued or undervalued currencies

YAS

Bloomberg "Yield and Spread" function that gives you a pre-calculated yield on a bond *The pre-calculated yield given by the function is the equivalent bank deposit yield (Bond Yield) and is available for any bond on the Bloomberg yield and spread function -The Equivalent Bank Deposit Yield assumes that you reinvest the annual coupon payments from the bond into a bank account that is paying a rate of interest that is equivalent to the bond yield -Essentially, it is the yield that will make an investor indifferent as to whether invest the lump sum into a bank account or to lend that money out and receive coupon payments that are then reinvested

b. Credit Default Swaps (CDS)

CDSs are a form of insurance against governments and corporations defaulting on their debt obligations -Often provide a more timely indication of a potential default than credit ratings do because they are actively traded -The higher the CDS spread, the higher the risk

FXCA

Currency Conversion Calculator

b. Government budget deficit as a proportion of GDP

Deficit to GDP is calculated by taking the annual government budget deficit, dividing it by GDP and then expressing it as a percentage -As a surplus is positive and a deficit is negative, governments with deficits have negative deficit to GDP ratios. In plain English, this means that the governments are spending more money than they are bringing in through taxation, relying on the bond market to finance their debt -The higher the deficit as a percentage of GDP, the higher the rate at which the government is racking up new debt. Investors will typically demand a higher yield as compensation for the elevated risk but there is no standard measure / rule.

Recession

Defined as 2 consecutive quarters of negative real GDP growth

Term Premium

Difference in yield between longer maturity bonds and shorter maturity bonds

FRD

Displays FX forward rates for currency pairs

FXC

Displays a currency rates matrix that shows currency pair values

ECTR

Displays a database of trade flows between major countries

PEG

Displays a table of currencies that are linked "pegged" to other countries' currency values

FX24

Displays currency pair trading 24/7

ESNP

Displays economic statistics of over 60 countries

WCAP

Displays stock market capitalizations of entire country stock markets around the world

ECOW

Economic Data Watch function -provides comprehensive data on economic indicators by country

ECFC

Economic Forecasts function -shows forecasts for different economic indicators -displays economic forecasts for identifying trends in global economies

ECSU

Economics Surprise Monitor -Displays 40 hand-picked meaningful leading indicators for the U.S. economy and tells to what percentage the indicator either surprised or missed analyst estimates -econometric model to guess turning points in the S&P 500

WECO

Enables you to find the World Economic Calendar -Select a country and see a chronological list of economic indicators to be released after Jan. 1

ECST S

Enables you to see the breakdown of the U.S. GDP -Provides economic data with context and customizable graphs

c. The aggressiveness of the repayment schedule

Essentially asking: Will the borrower have the cash available when the repayments come due? - Short-term interest rate are typically lower -By borrowing short-term and refinancing the debt on a regular basis, the US government takes advantage of the lower interest rates that are available to short-term borrowers. -Must be very credit-worthy to implement this strategy because lenders are way of this approach and may jack up interest rates to discourage these types of borrowing practices - however this is not at all a problem for the US

FXTF

FX Ticker Finder function -shows a list of all 155 unique world currencies

Flat Yield Curve

In 2006 the economy was accelerating and so Fed Chairman Ben Bernanke hiked short-term interest rates With good economic conditions and relatively high rates, bond investors began positioning themselves for when the economy would slow and rates would decrease When the fed cuts rates, yields decrease and bond prices increase Because of this, bond investors were aggressively buying long-term bonds which offsets the natural upward slope of the yield curve thus making it flatten -As the economy deteriorates, bond traders think rates will decrease so they buy longer-term bonds in anticipation of price increases. Prices up, yields down, curve flattening.

a. Credit Ratings

In the Bloomberg terminal, a green rating represents a recent upgrade while a red rating represents a recent downgrade The higher risk, lower rated corporate bonds (BB+) and below are called non-investment grade, speculative grade, high yield, or junk bonds

S&P 500

Market-cap weighted stock index

GP

Price chart used to identify trends and market patterns

DJIA

Price-weighted stock index

ECOS

Provides full details behind economist estimates for calendar releases

PMI

Purchasing Manager's Index -Most widely followed index of business confidence -A reading above 50 signifies optimism while a reading below 50 signifies pessimism -Published monthly on the first business day of the following month -In the terminal the Surv(M) column is the expectation for what the PMI will be and the Actual column is what the PMI actually is -There is a high correlation between PMI and GDP -PMI is a good leading indicator GDP growth

b. Inflation

Rising inflation typically erodes the price of fixed income instruments -this is because inflation erodes the value of future coupon and principal payments -Since the price of the fixed-income payment is decreased, the yield will actually increase with inflation since you are hypothetically paying less for the same amount of future cash flows (Despite the decreased purchasing power of those cash flows) **Yield calculations do NOT adjust for inflation and considered nominal calculations Borrows benefit from inflation as a borrower's salary, for example, typically rise with inflation while a borrower's obligation such as a mortgage for example does not increase with inflation

Sovereign Debt Market

Synonymous with the Government Bond Market

2. The Monthly CPI

The CPI is based on a representative basket of goods and services such as food, housing, and automobiles -In order for the CPI to be an effective measure of inflation it needs to be truly representative of the spending habits in that country -Published monthly around the middle of the following month

The Institute for Supply Management (ISM) and the Purchasing Managers Index (PMI)

The ISM (an Arizona-based association) has the most widely followed index of business confidence which is the Purchasing Manager's Index (PMI)

IFMO

The World Inflation Monitor -Shows the actual and forecast inflation rates for different countries

The "Spread"

The difference in yield between a corporate bond and a government bond of the same maturity -Corporate bonds are typically seen as being more risky and therefore have higher yields than government bonds

Inflation

The general increases in the prices of goods and services which diminishes the purchasing power of money -A unit of money tomorrow buys less than the same unit of money would buy today

2. Surprise Changes in Inflation

The laws of supply and demand apply to the world of currencies - excess money supply causes inflation When the money supply of one currency expands more rapidly than that of another - say, when the central bank printing presses are hard at work - the exchange rate of the first will tend to depreciate against the second. All else being equal, surprise rises in inflation will therefore weaken a currency

Left-hand end of the Yield Curve

The left-hand end of the Yield Curve is simply the Fed Funds target rate -When the rate sets a new interest rate, that is the yield of the most short-term t-bill on the yield curve

Price and Yield

The lower the price of a bond, the higher its yield (and vice versa) as a smaller up-front sum results in the same fixed amount of repayments down the road

Housing

The main indicator for residential housing construction is housing starts Published monthly around the middle of the following month

Equity Index Returns and Dividends

The return calculations derived from equity indices typically ignore dividends and are therefore lower than what investors actually receive

TIPS

Treasury Inflation Protected Securities -Compensate the lender in the event of inflation using CPI as a guide -By comparing the price of a similar non-inflation-protected bond with the price of a TIPS, an investor can better understand inflation expectations -The higher the expected inflation, the greater the investor demand will be for TIPS relative to normal bonds. Therefore, the greater the difference in yield between the two bonds.

Upward Sloping Yield Curve

Typically the yield curve is upward sloping this occurs because: -default and inflation premiums associated with longer maturity bonds

1. Adjusting Short-term interest rates

When ST interest rates increase, it becomes more attractive to deposit cash while dissuading consumption and investment -Therefore, increasing ST interest rates slow growth and contain inflation

3. Surprise Changes in Trade

When a country exports goods, the foreign buyer needs to buy the currency of the exporter and when the country imports goods, it needs to buy the currency of the foreign seller by selling the home currency Therefore, it net exports are positive, the country has a trade surplus and it will drive demand for the home currency If net exports is negative, the country has a trade deficit and it will diminish demand for the home currency Any surprise, therefore, in a trade surplus or a trade deficit can alter the value of a currency because it changes the demand for a currency

a. Government debt as a proportion of GDP

When a government borrows and spends, it drives GDP growth. But when the debt comes due, debt repayments inhibit GDP growth. And the greater the debt as a proportion of GDP, the greater the debt repayments and, therefore, the greater the drag on the economy -In 2017, Japan had a Debt / GDP ratio of 235% yet the yield on its government bonds were close to 0 thus proving that there is no general rule saying that bond yields will spike at a certain level of debt to GDP

Why does the Yield Curve Invert Before a Recession?

When investors predict rate cuts in anticipation of a recession, they buy long-term bonds at the right-hand end of the yield curve which sends their prices up and their yields down thus causing the overall yield curve to invert An inverted yield curve means that bond traders are predicting interest rate cuts, and interest rate cuts typically happen in response to a recession

Yields and Borrowers v. Lenders

When yields are high, prospective lenders are happy as they get relatively more repayments for their planned loans When yields are high, prospective borrowers are unhappy as they must promise to pay back relatively more to secure a loan

WIRA

World International Reserve Assets function that displays the amount of currency reserves by country

WCDM

a country debt monitor analyzing the financial condition of countries for debt investors

GY

a historic yield chart for a selected bond

SOVR

a monitor of global sovereign credit default swap spreads

CAST

a visualization of issuer capital structure

DDIS

a visualization of issuer debt repayment schedules

GC

a visualization tool for real time and historic yield curves

1. Credit Risks - Indicators Investors Consider (2)

a. Credit Ratings b. Credit Default Swaps (CDS)

1. Credit Risks - Factors Investors Consider (3)

a. Government debt as a proportion of GDP b. Government budget deficit as a proportion of GDP c. The aggressiveness of the repayment schedule

2. Macroeconomic Drivers

a. Short-term Interest Rates b. Inflation

FXFM

an FX rate forecast model which displays a bell curve of implied volatility

SRCH

an encyclopedia of bonds

RATD

credit rating scales and definitions from various debt rating agencies

CRPR

displays current and historical credit rankings by issuer from various rating agencies

ECFC

displays economic forecasts

FXFC

displays foreign exchange rate forecasts

BYFC

displays government bond yield estimates for various points in the future

GC3D

displays how a yield curve moves throughout time

IFMO

displays inflation tracking and data such as rates, targets, and forecasts

CSDR

displays real time credit ratings for sovereign borrowers

WB

monitors major sovereign bond yields and spreads

DEBT

ownership statistics of sovereign debt for select countries including the US

FOMC

policy decisions, news, and analysis of the Federal Open Market Committee

BUDG

provides data and analytics on the US Federal Budget

ILBE

shows breakeven inflation rates derived from inflation protected securities

GEW

shows key economic statistics by country

WIRP

shows the probability ascribed by the market to future interest rate decisions

YAS

yields and spreads on government bonds