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EFFECTS OF MACROECONOMICFACTORS AND POLICY ACTIONS
ON BOND YIELDSBy
Harsh MSankhala
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OBJECTIVE
To study the behavior Bond Yields withchanges in macro-economic
factors andpolicy actions
Factors considered are: Inflation
IIP
GDP
LAF
Monetary Policy
Fiscal Policy
Limitations: Effect of individuals factors are studied by
not
considering the effect of other factors
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DETERMINANTS OF INTERESTRATES
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INFLATION AND BOND YIELDS
Irving Fisher: the nominal interest rate equalsan expected real
interest rate plus expectedinflation.
Nominal Interest= Real Interest + ExpectedInflation
Inflation () Bond Yield ()
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INFLATION AND BOND YIELD
5/28/05 2/2/06 10/10/06 6/17/07 2/22/08 10/29/08 7/6/09 3/13/10
11/18/10 7/26/11 4/1/12
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
0
1
2
3
4
5
6
7
8
9
10
Time (month /Years)
10YearGoIYield%
YoYInflation%
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INFLATION AND BOND YIELD
Anomalies in Region A:
Borrowing sharply shot up above Rs.3,00,000 Cr
The year 2008-09 witnessed five announcements ofthe issuance
calendar
Average auction size crossed Rs.10,000 CrThe average borrowing
per day crossed Rs.1,000 Cr
touching as high as around Rs.1,650Cr
Multi-security auctions, three and sometimes evenfour securities
were auctioned
The coefficient of correlation between 10 year GoIYield and
inflation is 0.53
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REGRESSION EQUATION
Variable Type Details
Yield Dependent Monthly yield of 10 year
GoI securities/Bond
Inflation Independent YoY % change in inflation
Yield( t-1) Independent Monthly Yield of 10 year GoI bond for
the period( t-
1)
Inflation (t-1) Independent Inflation for the period (t-
1)
Adjusted R Square 0.72289777Equation of Yield:
Yield = 0.09132572*InflationYoY %
+ 0.79168237*Yieldt-1
-0.0746825*Inflationt-1 %
+ 1.50853416
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FORECASTED YIELD
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IIP AND BOND YIELD
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INFERENCES FROM GRAPH
Region 1 The period from June
2008 to October 2009 iscovered in this region
Government borrowed
huge sum of about 6 laccrores from the debtmarket during this
period
The region ischaracterized by slowdown in the beginning
At the end of the periodRBI has cut the reporate , CRR rate
whichimproved liquiditysituation and henceyields
Region 2: The period from June
2010 to December 2011is covered in this region
The Liquidity in the
system was soaked byRBI to contain inflation
There were almost 8 ratehikes the repo ratepeaked at around
8%
Government borrowingalso high during thisperiod of about
4,70,000cr.
Hence despite lower IIPnumbers the yieldincreased
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REGRESSION EQUATIONVariable Type Details
Yield Dependent Monthly yield of 10 year GoI
securities/Bond
IIP Independent YoY % change in Index
Yield( t-1) Independent Yield of 10 year GoI bond for
the period( t-1)
IIP (t-1) Independent IIP for the period (t-1)
Adjusted R Square 0.67370096
uation of Yield:
eld = 0.0100743*IIPYoY %
+ 0.80970662*Yieldt-1
-0.0029625*IIPt-1 %
+ 1.44510072
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FORECASTED YIELD
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PREDICTIVE POWER OF YIELDS
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LIQUIDITY AND YIELD
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LIQUIDITY- OMO
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CENTRAL GOVERNMENTBORROWINGS
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MONETARY POLICY RATES AND T-BILLYIELD
MONETARY POLICY RATES AND 10
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MONETARY POLICY RATES AND 10YEAR GOI BOND
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REGRESSION EQUATION
Variable Type Details
Yield Dependent Monthly yield of 10 year
GoI securities/Bond
Inflation Independent YoY % change in inflation
Yield( t-1) Independent Monthly Yield of 10 year
GoI bond for the period( t-
1)
GDP (T-4) Independent % change in GDP (YoY) for
period ( t-4
IIP Independent YoY % change in Index
CRR Independent RBI Cash ReserveRatio rate
Repo Rate Independent RBI Repo Rate
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REGRESSION OUTPUT
Equation of Yield:
Yield = 0.3432 *T-Bill yield + 0.6312* Yield T-1 -0.1005*GDP T-4
-0.00037764 *Inflation + 0.0185* IIP
+ 0.0740*CRR -0.3215* Repo -0.1602 *YieldSpread +3.013728
Adjusted R 0.772
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CONCLUSION
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REFERENCES
Data Source:http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home
https://www.ccilindia.com/Research/Pages/Introduction.
http://dbie.rbi.org.in/DBIE/dbie.rbi?site=homehttps://www.ccilindia.com/Research/Pages/Introduction.aspxhttps://www.ccilindia.com/Research/Pages/Introduction.aspxhttp://dbie.rbi.org.in/DBIE/dbie.rbi?site=home
