Bonds and the Currency valuations

Hey Guys, I’m still having difficulties understanding the relationship with Bonds and how they are valued, i would really appreciate it if some one could elaborate the concepts I’m struggling with….for example: Bonds traded around six basis points weaker during the morning session on Wednesday as the Rand continued to look what one analyst called “risky”. By 11:52 the short-term government R153 bond was at 9.950% from 9.895% at the previous close. (This was after the Rand fell against the Dollar) Concepts that I don’t understand is: A) Why do Bonds lose value when the currency depreciates? B) If the Bonds traded six basis points weaker…why is the movement from 9.895% to 9.950%? One would think it would be the opposite, 9.950 to 9.895% I’ve obviously missed something or have forgotten a fundemental concept… Thank you

Currency is weaker, so less demand to hold assets of that country…this effectively weakens bonds price…the yield falls back to 9.95… just think if there was more demand for the bonds the yield would reduce as you wanted them and would be prepared to receive a lower yield to own them, they have effectively become cheaper with the weaker currency as yield rises to make them more attractive to own. Tried to make that simplistic…currency falling and effect of bonds is only one aspect of potential price movement. If you work through a few calculations, you will see that with respect to yields /discounts, you make money by buying high and selling low!!!..Counter intuitive, but hard to forget once learnt.

I Perdition, thanks for the explanation, however i’m still dont really understand, when their talking about the yield are they talking about the yield to maturity?

Yes. It is the YTM. I think your question is due to a misconception of what YTM is. We find the YTM for a bond given it’s cashflows. That includes the current price you need to pay (outflow). So, value of a bond can be mentioned as absolute price, as a % or face or as a yield (see how it is done for Bill/Notes vs Bonds in US) In our case, when a bond becomes ‘weaker’ it means folks expect more returns. It’s price drops, yield increases.

Reineir Wrote: ------------------------------------------------------- > Hey Guys, > > I’m still having difficulties understanding the > relationship with Bonds and how they are valued, i > would really appreciate it if some one could > elaborate the concepts I’m struggling with….for > example: > > Bonds traded around six basis points weaker during > the morning session on Wednesday as the Rand > continued to look what one analyst called “risky”. > This is from BBC or something, yes? > By 11:52 the short-term government R153 bond was > at 9.950% from 9.895% at the previous close. > (This was after the Rand fell against the Dollar) > I don’t know anything about this bond, but it dropped in price not necessarily because of anything having to do with currency. > Concepts that I don’t understand is: > > A) Why do Bonds lose value when the currency > depreciates? There can be a bunch of reasons for this effect (I would use money supply explanations, usually), but that is not what is being talked about here. Above they said that the Rand looks “risky” which doesn’t mean it’s going to drop but that it is looking volatile. As a foreigner, putting money in Rand denominated bonds means that I am taking on currency risk. Taking on new currency risk means I need to be rewarded more to want to do it. That means the price on the bonds has to drop. (Note that if you hedge out currency risk on a foreign bond you end up with a synthetic domestic bond). > B) If the Bonds traded six basis points weaker…why > is the movement from 9.895% to 9.950%? One would > think it would be the opposite, 9.950 to 9.895% > These other guys got this one. > I’ve obviously missed something or have forgotten > a fundemental concept… > > Thank you

Appreciate all the feed back, thank you all so much. Been a real big help. Cheers : )

One last query: Is the following relationship terminology correct? 6 points weaker at 9.95% from previous close of 9.89% (YTM Up) Bad for Bond Holders- Asking Price Down 6 points stronger at 5.60% from previous close of 5.66% (YTM Down) Good for Bond Holders-Asking Price Up Thanks

Correct.

YTM is proportional to Cashflow/Price.

^ ? YTM is the yield that equates the discounted cash flows to the current price.

current yield. not YTM.

Current yield? Sound good.

Current because it’s the bond interest rate as a percentage of the current price of the bond. price fluctuates,no?

It’s the bond’s coupon yield/price of bond. The bond’s interest rate would usually be the bond’s ytm (although a bit ambguous)