FIXED INCOME

MARKETS
ASSIGNMENT EXPERIENTIAL LEARNING

Tanushi
ROLL NO. 42309
MBA -2, FINANCE D
SEMESTER- III
 Fixed Income Markets

Question: Watch the below videos and prepare a summary of what you have understood
from each of the video:

1. https://www.youtube.com/watch?v=Ck0zy2Q9BME
2. https://www.youtube.com/watch?v=eyBZWrp9P4U
Solution:
Negative Yield Bonds:
The initial two given recordings cover the subjects of negative yield securities, how they
work and why the financial specialists buy the equivalent. At the point when a financial
specialist loans cash, they anticipate a profit for the equivalent, i.e., coupon instalments.
These coupons, as a small amount of the cost, decide the Yield to Maturity. The cost of the
security having a reverse relationship with the YTM, makes the yield fall as the security
value rises, and the other way around. As the security costs rise considerably further, the
yield contacts zero and eventually pushes to negative. This connotes that the financial
specialists are accepting less cash than they initially paid. Notwithstanding, regardless of this,
internationally around $16 trillion worth of securities at present, convey a negative yield.

Nations, for example, Austria, Belgium, Denmark, Finland, France, Germany, Netherlands,
Japan and Switzerland have all begun giving negative yield securities. Because of low
development combined with low swelling, the Central Banks of a few created countries have
begun to check expansion and empower spending in the economy through Quantitative
Easing. Securities, being considered as a protected speculation resource and furthermore
having an exceptionally fluid auxiliary market, keeps on encountering popularity and
accordingly, rising costs.

Given the present circumstance, financial specialists, for example, banks, insurance agencies
and annuity reserves select purchasing these negative yielding securities with the point of
selling them before development at a greater cost, in this manner procuring benefit. In the
short-run, this will collect the cash supply in the economy because of rising interest.
Nonetheless, over the long haul, it would bring about lower returns on benefits, assets and
retirement accounts, making the labourers save more and work for longer hours. Slow
development rate, political vulnerability and exchange questions are pushing the
speculators towards these negative yield securities, which will undoubtedly hinder the
economy over the long haul.

3. https://www.youtube.com/watch?v=DCQwiF0J7hw
Solution:
Yield Curve:
The yield curve is a graph which shows the relationship between the short-term and the
long-term interest rates of U.S. Treasury notes, which have been utilized by a few
financial analysts and policymakers to foresee the chance of a forthcoming downturn.
Typically, the drawn out returns expected by financial specialists are higher than the transient
returns, as they are facing higher challenge because of the time-frame included. In any case,
when the drawn out returns plunges underneath the momentary returns, it causes an inverted
yield curve, which have in the previous 50 years went before all the significant downturns
looked by the U.S. economy.

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In 1989, financial specialist Arturo Estrella built up a model utilizing the 3-month and 10-
year loan costs to anticipate the looming plausibility of a downturn in the economy. In the
event that the drawn out standpoint stays unaltered, returns begin missing the mark run
borrowings to be more costly than long haul borrowings. This influences a financial
specialists hazard craving, accordingly driving up downturn. Generally, a recession doesn’t
occur after an inverted curve appears, but instead in a year's time. A caveat is that inverted
curve lasting for short duration, for example, a day, a week or even a month are viewed as
exemptions for this standard. Regardless of questions on the transformed yield curve's
prescient force, it is as yet a significant pointer that the economy is going to hose later on.

4. https://www.youtube.com/watch?v=i3gIJrABLSc
Solution:
Green Bonds:
Green securities are fixed income instruments which are utilized to fund-raise for
organizations occupied with supporting atmosphere and natural tasks. Environmental
change being one of the major ecological concerns, was investigated by a gathering of
Swedish financial specialists intending to fuse natural ventures into their portfolios. Being
low on venture danger and explicit nation hazard, while having comparative attributes as
other fixed pay protections, the main Green Bond was given by the World Bank in 2008.

The World Bank, in relationship with different banks set down rules with respect to the
utilization of these securities on the lookout. Atmosphere hazard has become a monetary
danger which requires straightforwardness as far as atmosphere hazard introduction to the
speculations. Green Bonds encouraged the speculators to measure the social effect of their
ventures, and in this way empowered effect detailing, which added an incentive as far as
responsibility. Since its initiation, the World Bank has raised more than $13 billion out of 20
monetary standards to subsidize environmental change ventures far and wide.

5. https://www.youtube.com/watch?v=suOuF_JuR-Q
Solution:
Indian Bond Markets:
This video is a panel discussion between Dr. Arvind Rajan (CFA, Managing Director,
PGIM Fixed Income, USA), Lakshmi Iyer (CIO AND Head Products, Kotak Mahindra
AMC), Sachin Pillai (CEO, Hinduja Leyland Finance Ltd.) and Kartik Srinivasan (Sr. Vice
President, Group Head Financial Sector, Ratings ICRA) where they talk about “What’s
ailing the Indian bond markets?”

Sachin Pillai talks about how the most recent year and a half have been extreme and trying
for the NBFC segment. It began post the IL&FS and DHFL emergencies, which nearly
occurred in progression. The quick response they saw between Oct '18 and Jan '19 was a ton
of rearrangement to NBFCs' risk profiles. This prompted a log jam as far as dispensing,
generally brought about by ALM crisscrosses in the framework. Progressively transient
obligation profiles were supplanted by long haul profiles. Retail NBFCs or those that had
beginning capacities on the granular side had the option to do it a lot quicker. They saw
practically all retail NBFCs return to business from February onwards – it was 'nothing new'.
Thus, it was very brief. The greater part of the resource classifications introduced were
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invited by banks - there was revenue in taking them, on a portfolio premise. They henceforth
observed a great deal of sell-down which brought back liquidity into the business, all things
considered.

Around a similar time, they saw the window arise for seaward borrowings. There were two or
three huge issuances. Liquidity had never been an issue for a couple of years ahead of the
crisis. In this way, when it happened post Sep 2018, banks kept on loading up on money with
the seaward window even after the correction. It was an instance of once chomped, twice
timid. Banks sat on heaps of money; and money became lord at the expense of negative
convey. The problem still remained for discount NBFCs since banks don't take a gander at
those resources to renegotiate.

Hinduja Leyland Finance are vehicle agents; hence they are more on the retail side of the
business. Since the time they began activities in 2010, a few things they set up taking
everything into account, caused an emergency because of NBFCs' over dependence on
transient liabilities. The greater part of them were holding 15-20% of their liabilities as
Commercial Paper (CP).

Every one of their credits amortize consistently, so while they give their portions each month,
they reimburse on a quarterly, half-yearly or yearly premise. In a normal Financial Year, their
typical assortment is INR 10,000 crores, yet their whole reimbursement and cost set up is just
INR 6,000 crores. Given this model, they never had a solitary day of stoppage in dispensing.

Lakshmi Iyer explains the situation with Fund houses by taking an example of South Indian
Star Rajnikanth. She draws the comparison between them by describing how similar set of
movies starring a new comer in the industry might not work out for him as they did for
Rajnikanth. Similarly, Fund houses that could not copy well had a series of flops on the box-
office. During the most recent year and a half, the beat of the value market was reliant on the
fixed pay markets. As of December 2019, after over a year into the IL&FS emergency, there
is no significant cure in the security market assumptions. There have been little lines, yet
nothing material. The explanation is twofold:
1. The expectation was a credit risk fund will never default. But, at the point when that
desire was not met, when an AAA-evaluated establishment floundered, individuals
began abandoning this category. This was a shock to people but it has become better
with time. Individuals have now started to frame their own perspectives. Credit
spreads have broadened. Urgency to bring in cash in the business sectors is
additionally prompting botches by cash directors. The horrible showing of AAA
legends is prompting the rise of another arrangement of geniuses.
2. Also, the investors are now able to differentiate the wheat from chaff which has
helped them shake off the slumber.

Dr. Arvind Rajan talks about how foreign investors invest in Indian equities, Forex
Reserves, Government Debt and in private credit. The homegrown credit markets are not all
that effective or not even completely created in India. They likewise don't have the
framework and the capacity to do the due perseverance. There have been such incidents in the
past as well. For e.g.: In US 2008 emergency where an enormous shadow banking framework
was uncovered. Currency market subsidizes that should have no credit hazard had taken on
organized notes that were apparently short in term which truth be told had enormous credit
hazard installed in them. At the point when that became visible, here was an immense crash
and following that controllers needed to clip down to dispose of the shadow bank. Another

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example he talks about is from China. China has found a way to cinch down on in its shadow
banking framework. Trusts were equal vehicles of bank loaning that jumped up some of them
worked through the web, and some worked as side workplaces to the bank.

With the help of these examples, he explained bad credit ratings and regulatory arbitrage. At
the point, when you arrive at a circumstance where individuals lose certainty in light of a
specific episode that happened in the past, the arrangement could be to re-channel credit
through more ordinary channels where controllers can watch out for things, where individuals
can't undermine evaluations and where they need to coordinate developments, especially with
regards to more modest and less fluid credit or since quite a while ago dated credit loaning.
The degree of risk that is seen by speculators needs to match with underlying principles.

At last, Karthik Srinivasan elucidates how past one and a half year has been challenging for
not only credit rating agencies but for almost all constituents of the economy. There has been
no major change in the way these credit rating agencies analyse the credits. Although there
has been some developments and improvements in the existing processes to gain more
insights for them to look at a few more aspects. Post the crisis, they have taken a closer look
at the liquidity position of the organisations. And the history suggests Cash has never really
been a problem except during few weeks in 2000 or for a month in 2008. Also, the liquidity
in the BFSI sector has increased from 1-2% to 5-6%.