Grab a cup of coffee, in this thread I will explain
1. What is a Yield Curve? 2. Why is it an important indicator of Recession? 3. Is an Economic Recession around the corner?
Lets dive right in!
Before we understand a Yield Curve, lets get some of the basic terminology out of the way
1. What is a Bond?
A bond is a fixed income financial instrument which represents a loan made by an investor to a borrower
The investor typically receives payment in the form of interest and a lumpsum (principal) on maturity
The interest rate on a bond is known as coupon rate.
There are many types of bonds like
1. Zero Coupon : Pays both interest and principal at maturity 2. Sovereign Bonds : Issued by a Government or a Quasi Government Institution 3. Corporate Bonds : Issued by corporate like banks, established companies etc.
Coupon (Interest Rates) on a bond are decided based on the issuer's credit rating
The higher the credit worthiness of the issuer, the lower the coupon rate
Credit Rating on a Bond is usually assigned by credit rating agencies like Moody's or Standard & Poor's (S&P)
US Treasury Bonds are always assigned a rating of AAA (Triple A) as they are backed by the Government and are considered default free
Anything with a credit rating of BBB (Triple B) or lower is considered as 'junk bond' or a 'high yield bond' as they have high risk of default
2. What is Yield?
Yield is simply the return an investor of a bond realizes over the course of the bond holding period
Formula for calculation of a Bond Yield
Bond Yield = Interest Payments / Bond Price
Since, coupon (interest) payments on a bond along with tenure of a bond is fixed
your yield on a bond simply depends on the change in its price
Let me explain this concept with an example of a Dividend Yield (easier to relate to)
The logic and concept followed for calculation and estimating a Dividend Yield can be directly applied to a bond yield as well.
Take for example, Dividend Yield calculation of ITC
ITC as per its policy issues out 85% of its profits as Dividends to its Shareholders, this comes to around ~Rs 10/share
When ITC was trading
at 180/share, the Div. Yield was 5.5%
at 254/share, Div. Yield is 3.93%
In the above calculation, the dividend didn't change but because the price in denominator of our formula changed, it led to a change in Dividend Yield
If Bond Prices go up, the Yield on the bond will decrease
If Bond Price come down, the Yield on the bond will increase
Just like stock prices, bond prices keep on changing depending on economy, Central Bank interest rates, demand + supply etc.
3. What is a Yield to Maturity?
Suppose if you buy a 10 year Govt Bond that pays 5% interest yearly for Rs 1000
If instead of selling the bond when bond price rises to Rs 1100, you held on to your bond until its maturity date till end of 10 years
The present value of all the coupon (interest) payments that you will receive on the bond along with the principal repayment at the end of 10 years, is called Yield to Maturity.
An Inverted Yield Curve has successfully predicted every recession since 1957
It even inverted right before the pandemic!
Typically an economic recession follows after 7 to 24 months since the Yield Curve Inversion
Most recently the US Treasury 2 and 10 yr Yield Curve Inverted on 29th March 2022
imply the onset of a recession anytime between end of 2022 to 2024.
This brings me to the last Question of this thread
IS AN ECONOMIC RECSSION AROUND THE CORNER?
Short Answer : Nobody knows
All Economies, work on a Peak to Trough cycle and as much as Expansions are part of the Economic Cycle, so are Recessions
Without Recessions, we wouldn't have the opportunity to reset and economy would overheat and turn into a bubble which when popped could bring depression.
For a Recession to happen, you need several ingredients
1. Slowing Economic Growth 2. High Unemployment Rate 3. High to Medium Fed Interest Rates
None of the characteristics today satisfy the onset of a Recession
For example,
US last week reported the lowest joblessness since 1969!
World Economic Growth isn't slowing down
And Fed Interest Rates are at the bottom they have ever been with the only option for Fed to Increase them and not decrease them as they would to prevent a recession
Inflation is rampant throughout the world today but that inflation is not caused by lack or overdemand in the economy (as it would during a peak of an economic cycle)
The inflation today is purely a result of supply side shortages cause by the onset of the pandemic
Considering all of the above, will we face a recession as predicted by the Yield Curve?
I don't know and I am not sure if anybody does.
Thank you for reading!
I hope you've found this thread helpful. Follow me @itsTarH for more.
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Grab a cup of coffee. In this thread, I will explain:
1. What is Behavioral Finance? 2. What are biases and how do they impact 99% of investors? 3. What are different types of biases and how to overcome them?
Let's dive right in.
2/ Behavioral finance is a field that studies how psychological, human biases and emotions influence financial and investment decision-making.
3/ Humans by nature are driven by emotions and are a irrational species.
This irrationality seeps through in investing, finance and global capital markets.
Grab a cup of coffee. In this thread, I will explain:
1. What is cost of capital and WACC? 2. How does a company's capital structure impact its valuations? 3. How to code WACC as a field in screener?
Let's dive right in.
2/ Before we start to explore cost of capital, we first need to understand what is meant by capital structure of a company.
3/ Any business at a very simplified level, works in three steps
Step 1: Raise funds from various types of investors
Step 2: Use those funds to build projects that generate higher returns
Step 3: Deliver excess returns back to investors
1⃣ Provide loans to banks
2⃣ Value US Treasuries held by banks at par for collateral, even if they are currently not valued at par
3⃣ Inject USD 25B into banking system
They are calling it BTLP
Its essentially QE with a different label
It took Fed ~2 years to sell $600B and only a few days to reverse 50% of that
Just last week alone Fed bought $300B worth of assets
Current size of Fed Balance Sheet ~8.5Trillion USD
This is the MOVE index, its volatility index for Bonds, similar to what VIX is for equities
The only time when MOVE was higher than current levels, was in 2008
#AartiPharmaLabs lists today, here are some slides from my presentation at @ias_summit to help you understand the business ⤵️
The current share price is expensive, I wouldn't be a buyer at this price 🛑
D: Not an investment recommendation
@ias_summit At 315/share, the market is implying a market cap of ~2850.75cr to the company or a PE multiple of ~18x TTM earnings
@ias_summit Since, the implied valuation is towards a premium & there are large institutional holdings in Aarti Industries, expect decent amount of selling in next few weeks
On the other hand, I also believe promoters will raise stake so need to monitor this for sometime before entering
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