User Name: Password:      Register - Lost password?

Forex News Blog
Back to The Headlines
Wednesday June 21, 2006 - 16:16:32 GMT
Lloyds TSB Financial Markets - www.lloydstsb.com/corporatemarkets

Share This Story:
| | Email

What does the 'Fed model' tell us about bond yields?

Recent safe-haven flows have led to a fall in yields at the long end of the curve
Government bond yields have edged lower in recent weeks as equity prices declined, suggesting that markets may have become slightly more concerned about economic growth prospects. However, the fall in yields have tended to be more at the long end of the curve, such as 10-year yields, rather than the short end. In other words, yield curves have generally flattened. Markets have become increasingly uncomfortable about the pricing of risk which implicitly assumed a continuation of strong economic growth, low inflation and hence high real returns. Thus, it seems that safe-haven flows into bonds have suppressed yields particularly at the long end. In the past week, some signs of stabilisation in equities have led to a backup in bond yields.

At the short end, yields have not fallen by as much and this reflects the ongoing trend in global monetary tightening. The US Federal Reserve looks likely to raise interest rates at the June 28-29 meeting. It has voiced its concerns about inflation risks with US CPI inflation heading above 4% on the year-on-year comparison. This has supported yields at the short end.

In Europe, the European Central Bank is expected to continue to raise interest rates this year with EU-12 CPI inflation currently well above the 2% target and M3 money supply continuing to signal excess liquidity in the economy. In the UK, the Bank of England is expected to raise interest rates by 25bps this year with CPI inflation expected to rise further above target during the summer (currently 2.2% for May), though core CPI remains well below 2%.

Notwithstanding the difference in the yields at the short and long end of the curve, the general decline in yields since mid-May poses the question again whether bond yields are still too low, i.e. whether bonds are expensive.

Are yields too low?
We posed a similar question a few weeks back in the Economics Weekly (“The end of the bond market conundrum?”, 10 April 2006). At the time, UK 10-year bond yields were only 4.4% and US yields were 4.9%. Based on a model using interest rates and inflation data, we projected that the ‘fair value’ bond rate is 5.5% for the UK and 5.25% for the US. Hence, UK bond yields were more than 100bps below fair value and US yields were about 35bps below. In other words, bonds were expensive, particularly in the UK.

Bond yields have backed up in the past week on some signs of stabilisation in equities, but a degree of financial market volatility is likely to persist. Yields, however, remain below the recent May 12 highs, just before the recent equity market sell-off. US 10-year yields are currently 5.15% with UK yields at 4.72%, German yields at 4.00% and Japanese yields at 1.87%.

The Fed model - comparing bonds and equities
The Fed model is based on the idea that bonds and equities are competing assets and it compares bond yields with the earnings yield (inverse of the price-earnings ratio) on equities. The model is not without its critics and it was never formally endorsed by the US Federal Reserve but a Federal Reserve report to Congress in July 1997 suggested the bank was following it.

According to the model (or a variant of the model), if the ratio of bond yields to earnings yields falls below the long-term average, then this would suggest that bond yields are ‘too low’ compared with earnings yields, i.e. bonds are expensive relative to equities, and vice versa. To obtain the earnings yield data, we calculate trailing five-year price earnings ratios for the US, UK, Germany and Japan. Bond yields are based on benchmark 10-year cash yields.

They indicate that, for the US, the bond yield/earnings yield ratio has averaged 1.5 since 1984 - see Chart 1. The ratio soared to 2.3 in 2000, suggesting that bonds were cheap relative to equities, but fell to 0.8 in 2003 which indicated that bond yields were too low, caused by fears of deflation. It is currently at 1.4, suggesting that current bond yields are broadly fairly priced against equity yields.

For the UK, the bond yield/earnings yield ratio has averaged 1.3 since 1984 - see Chart 1. The ratio rocketed to 2.1 in Q3 1987, suggesting that equities were expensive relative to bonds, before the stock markets crashed. At the start of 2003, the ratio fell to only 0.6, suggesting that bond yields were too low. In 2006, it has risen to 0.9, still well below the 1.3 average, and suggests that bond yields need to rise to about 6.5% to raise the bond yield/earnings yield to the long-term average. But the 1990s saw a marked fall in UK inflation and it may be more appropriate to take the average bond yield/earnings yield ratio from 1992 which would suggest that bond yields need to rise to 6% rather than 6.5%. If we take the average from 1997, when the Bank of England was made independent, hence improving monetary policy credibility, the bond yield/earnings yield ratio has averaged only 1.0, suggesting that the current bond yield may not be substantially too low after all.

In the euro area, the bond yield/earnings yield ratio has averaged 1.2 since 1984 - see Chart 2. The ratio is currently only 0.7, well below the long-term average and suggests that bond yields are still too low. Perhaps the weak economic growth in the euro area economy in recent years has led to permanently lower bond yields. In the past five years, the bond yield/earnings yield ratio has averaged only 0.6 which is in line with the current figure.
In Japan, the bond yield/earnings yield ratio has averaged 1.7 since 1984 - see Chart 2. The ratio is currently only 0.9 which suggests that bond yields are too low. However, the country has been battling against deflation in recent years and official interest rates remain at zero. The bond yield/earnings yield average since 1995 has in fact averaged 0.9 which is bang in line with the current figure.

Overall, of the four economies we have analysed, it suggests that US bonds are broadly fairly priced compared with equities (but yields could still be higher), UK bond yields are too low and German/Japanese bond yields are far too low. However, this is based on average bond yield/earnings yield ratios since 1984. Arguably, structural changes in some of economies indicate that current bond yields may only be slightly too low.

Hann-Ju Ho
Senior Economist
trevor.williams@lloydstsb.co.uk
www.lloydstsbfinancialmarkets.com
Lloyds TSB Bank,
Financial Markets
Division,
Faryners House,
25 Monument,
London EC3R 8BQ
Switchboard:
0207 283 - 1000

Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.

 

Forex Trading News

Forex Research

Daily Forex Market News
Forex news reports can be found on the forex research headlines page below. Here you will find real-time forex market news reports provided by respected contributors of currency trading information. Daily forex market news, weekly forex research and monthly forex news features can be found here.

Forex News
Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



Elevate Your Trading With The Amazing Trader!

The Amazing Trader includes:
  • Actionable trading levels delivered to YOUR charts in real-time.
  • Live trading strategy sessions.
  • Market Updates with Trading Tools.

Register To Test Your Amazing Trader


Trading Ideas for 11 December 2017

Register for the Amazing Trader

1.

Amazing Trader EVENT RISK Calendar:

Tue 12 Dec
09:30 GB- CPI
10:00 GB- ZEW Survey
13:30 US- PPI
Wed 13 Dec
00:30 AU- Employment
09:30 GB- Unemployment
13:30 US- CPI
15:30 US- EIA Crude
19:00 US- Fed Decision
Thu 14 Dec
07:30 CH- SNB Decision
All Day- Global- flash PMIs
12:00 GB- Bank of England Decision
12:45 EZ- ECB Decision
13:30 US- Retail Sales
13:30 US- Weekly Jobless
14:45 US- Industrial Production

Forex Trading Outlook


Potential Trading Opportunities

  • POTENTIAL PRICE RISK: Mediun Tue--10:00 GMT-- DE- ZEW. Second Tier Sentiment Survey
  • POTENTIAL PRICE RISK: HIGH-Medium Tue--13:30 GMT-- US- PPI

  • POTENTIAL PRICE RISK: HIGH-Medium Wed--09:30 GMT-- GB- Employment
  • POTENTIAL PRICE RISK: HIGH Wed--13:30 GMT-- US- CPI
  • POTENTIAL PRICE RISK: Medium Wed--15:30 GMT-- US- EIA Crude
  • POTENTIAL PRICE RISK: High Wed--19:00 GMT-- US- Fed Decision


  • POTENTIAL PRICE RISK: HIGH- Thu --00:30 GMT-- AU- Employment
  • POTENTIAL PRICE RISK: Medium- Thu --All day-- global- flash PMIs
  • POTENTIAL PRICE RISK: HIGH-Medium- Thu --07:30-- CH- Swiss National Bank Decision
  • POTENTIAL PRICE RISK: HIGH-Medium- Thu --09:30-- GB- Retail Sales
John M. Bland, MBA
co-founding Partner, Global-View.com EXCLUSIVE: Global-View Daily Trading Chart Points Updated

EXCLUSIVE: Global-View Free Forex Database updated




TRADER ADVOCACY ARTICLES

Trader's Advocate Articles..

pic

Retail Forex Brokerage Changing!

Are you looking for your first broker or do you need of a new one? There are more critical things to consider than you might have thought.

We were trading long before there were online brokers. Global-View has been directly involved with the industry since its infancy. We've seen everything and are up-to-data with recent regulatory changes.

Our Best Brokers listing section includes:Forex Broker Reviews, Forex Broker Directory, Forex Broker Comparisons and advice on How to Choose a Forex Broker

If would like guidance, advice, or have any concerns at all ASK US. We are here to help you.

SEE Our Best Brokers List

Currency Trading Tools

  • Live rates, currency news, fx charts. 

  • Research reports and currency forecasts.

  • Foreign Exchange database and history.

  • Weekly economic calendar.

Directory of  Forex trading tools

 
Terms of Use    Disclaimer    Privacy Policy    Contact    Site Map


Forex Forum
Forex Trading Forum
Forex Forum + forex rates
Forex Forum Archives
Forex Forum RSS
Free Registration

Trading Forums
Currency Forum Guide
Forum Directory
Open Forum
Futures Forum
Political Forum
Forex Brokers
Compare Forex Brokers
Forex Broker News
Forex Broker Hotline

Online Forex Trading
Forex Trading Tools
Currency Trading Tools
Forex Database
FX Chart Points
Risk/Carry Trade Chart Points
Economic Calendar
Quicklinks to Economic Data
Currency Futures Swaps
Fibonacci Calculator
Currency Futures Calculator

Forex Education
Forex Learning Center
FX Trading Basics Course
Forex Trading Course
Forex Trading Handbook

Forex Analysis
Forex Forecasts
Interest Rate Forecasts
Central Bank Forecasts

FX Charts and Quotes
Live FX Rates
Live Global Market Quotes
Live Forex Charts
US Dollar Index Chart
Global Chart Gallery
Daily Market Tracker
Forex News
Forex Blog
Forex News
Forex Blog Archives
Forex News RSS
Forex Services
Forex Products
GVI Forex
Free Trials
FX Bookstore
FX Jobs and Careers
Jobs USA
Jobs UK
Jobs Canada

Forex Forum

The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.

Forex News

The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.

Currency Trading

Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.

Forex Brokers

The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.

Forex Trading

Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.

FX Trading

Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.

Forex Blog

Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.

 

WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.

Copyright ©1996-2014 Global-View. All Rights Reserved.
Hosting and Development by Blue 105