0% bond yield
December 17th, 2020
1 minute read
Breaking 6%
I don’t know if you’ve noticed, but Indonesia’s 10-year benchmark bond yield is falling. In October the yield was 7.1% & we wrote that as inflation was low & the rupiah stable, there was room for the yield to fall. This week the yield has fallen to 5.8% & there is still plenty of room to fall ... to 0%.
Inflation, GDP & rupiah
Government bond markets are often considered to be the risk free assets for a given currency. This means that the yield can go up & down based on risk. But most of the time our yield is a function of three related things. The three things are the movement of the rupiah, the rate of inflation & the economic growth.
Five years ago
If we go back five years ago to the beginning of 2015, the yield on the ten year government bond was at 7.4%. Nominal GDP growth was at 9%, inflation was at 7.3% & the rupiah was falling through 12,000 & depreciating at 6%. The average of the three was 7.3% which is almost exactly matching with the bond yield.
Now
Fast forward to today. & two of our three indicators are below 0% while the third is close to 0%. Nominal GDP has averaged -6% the second & third quarters. Inflation is averaging only 1.5% in the last few months. The rupiah (using a quarterly average change) is now appreciating at a rate of -5%. Our indicators’ avenge is -2%.
0%
Not surprisingly this is putting pressure on bond yields to fall. The yield could fall to zero GDP growth will recover, but that will only bring the average back to zero. Recovery will help strengthen the rupiah which will help to reduce inflation. As yields fall, cashflow yield will become more valuable. This is how we do our stock valuations.
1 minute read
Breaking 6%
I don’t know if you’ve noticed, but Indonesia’s 10-year benchmark bond yield is falling. In October the yield was 7.1% & we wrote that as inflation was low & the rupiah stable, there was room for the yield to fall. This week the yield has fallen to 5.8% & there is still plenty of room to fall ... to 0%.
Inflation, GDP & rupiah
Government bond markets are often considered to be the risk free assets for a given currency. This means that the yield can go up & down based on risk. But most of the time our yield is a function of three related things. The three things are the movement of the rupiah, the rate of inflation & the economic growth.
Five years ago
If we go back five years ago to the beginning of 2015, the yield on the ten year government bond was at 7.4%. Nominal GDP growth was at 9%, inflation was at 7.3% & the rupiah was falling through 12,000 & depreciating at 6%. The average of the three was 7.3% which is almost exactly matching with the bond yield.
Now
Fast forward to today. & two of our three indicators are below 0% while the third is close to 0%. Nominal GDP has averaged -6% the second & third quarters. Inflation is averaging only 1.5% in the last few months. The rupiah (using a quarterly average change) is now appreciating at a rate of -5%. Our indicators’ avenge is -2%.
0%
Not surprisingly this is putting pressure on bond yields to fall. The yield could fall to zero GDP growth will recover, but that will only bring the average back to zero. Recovery will help strengthen the rupiah which will help to reduce inflation. As yields fall, cashflow yield will become more valuable. This is how we do our stock valuations.
