Sunday, August 28, 2011
The European Central Bank (ECB) announced Monday it had bought for 14.291 billion Euros of government bonds of countries in the euro area from 11 to 17 August. Its previous "purchases" were $ 22 billion the previous week. The ECB also held Tuesday a tender for deposits to a week to absorb excess liquidity caused by these operations.
August 19, its purchases of government bonds totaled 110.5 billion Euros, these measures within the scope of its outstanding program reactivated in August. Even if the ECB did not want to disclose more information about the origin of the securities purchased, it seems that the Central Bank has acquired principally Spanish and Italian bonds, continuing its policy last week.
Not surprisingly, when it's soaring rates applicable to the debt of Spain and Italy leading the institution to reactivate its procurement processes of public debt, in order to try to contain the contagion of the crisis. Overall, the ECB has bought 110.5 billion euros of shares since May 2010.
Monday, May 30, 2011
What is the advantage to invest in an instrument whose return is zero, then we get the same result by quietly leaving the money in a bank account? The problem is that it is not so easy with a bank account, it was opened at bank, and including advertising adorns this post. Or is it the fear of deflation, which suggests a yield of 0% still provides a positive real rate? The credit market is very ill, much more in fact than the equity market, which has adjusted the profit expectations.
Without understanding what was happening, I recently bought a convertible bond, which gives me 27% return in just over a year. The company has no other debt, generates cash flow largely positive, and blocked the bank the amount of reimbursement for such convertible. Is it the risk that the bank will default that gave this profitability? I noticed that an investor sold his shares in bundles of 500, hidden orders, so obviously forced. I turned the problem into my poor brain disoriented; I did not find any other explanation for what seemed like a gift, although I'm not really quiet on this. The title has yet taken up 12% since.
0% for a Treasury Bond, 27% for a corporate bond with little risk of default risk compensation definitely does not turn round on the planet by Finance.
There is no surprising that the rising stock market has since been held in conjunction with the rise of the bonds, the yield of government bonds to 10 years back from 4% to 3.50%.
In my opinion, the phenomenon is rather healthy. It is true that in times of intense crisis, we see the fall of actions coincide with the rise of the bonds, in a movement of flight to quality. This divergence implies then a very strong rise in the risk premium on equities.
In an assessment of market shares made by discounting future cash flows, the relevant discount rate is the rate "risk free" government bonds plus the risk premium on the market. This means that the increase of joint stocks and bonds is reflected, side actions, lower the discount rate as a result of lower risk-free rate. Looking back a little, we know that rising stock between 1995 and 1999 could be largely explained by lower bond yields during this period.
In recent months, there was again a decline in risk premium, which can be read for example in the course of corporate CDS and in reducing the implied volatilities of options and that improved earnings expectations.
Decrease the risk free rate, reducing the risk premium, higher earnings forecasts: These three elements combine to explain the current rally in equities.
Whether it goes well in the optimism is that another story.
Saturday, March 6, 2010
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