Quarterly Bulletin
Bond Market Articles
| 2008 Q2 | Recent advances in extracting policy-relevant information from market interest rates  (3.6mb) By Michael Joyce, Steffen Sorensen and Olaf Weeken of the Bank's Monetary Instruments and Markets Division. Market interest rates form an important part of the transmission mechanism of monetary policy. They also contain information about market expectations of future policy rates as well as attitudes to, and perceptions of, risk. Extracting and interpreting this policy-relevant information is not straightforward, however. This article describes recent advances in this field and how they can be used to shed light on the downward trend in long-term real forward interest rates and the upward trend in long-term inflation forward rates, both developments that have attracted the attention of policymakers. |
| 2007 Q4 | Decomposing corporate bond spreads (1.5mb) (By Lewis Webber of the Bank's Systemic Risk Assessment Division and Rohan Churm of the Bank's Conjunctural Assessment and Projections Division.) Sterling, dollar and euro-denominated corporate bond spreads narrowed substantially between late 2002 and mid-2007, but widened abruptly during the recent financial market turmoil. This article uses a structural credit risk model to examine the extent to which movements in spreads over the past decade have been driven by credit and non-credit related factors. Compensation for bearing non-credit related illiquidity risk appears to have been a particularly important driver of high-yield spreads, including during the recent financial market turmoil, but the compensation required for credit risk has also increased recently. |
| 2006 Q4 | Recent developments in sterling inflation-linked markets (620k) (By Grellan McGrath and Robin Windle of the Bank's Sterling Markets Division). Sterling inflation-linked markets have developed rapidly over recent years, both in size and complexity. These changes have been driven by increased demand, especially from institutional investors such as pension funds, which has stimulated new supply as well as the rapid development of the market for inflation swaps. This article surveys these developments and considers their implications, in particular for the way risk is transferred between market participants and the interpretation of observed market rates. Market contacts suggest the increases in activity and the number of participants have enhanced efficiency in these markets, although the timing of demand and supply flows can still influence observed market prices. Looking ahead, there are considerable uncertainties as to the size of future demand and supply in the market. |
| Spring 2006 | New information from inflation swaps and index-linked bonds Understanding the term structure of swap spreads |
| Winter 2003 | Understanding
and modelling swap spreads
(141k) (by Fabio Cortes of the Bank's Foreign Exchange Division). Interest rate swap agreements were developed for the transfer of interest rate risk. Volumes have grown rapidly in recent years and now the swap market not only fulfils this purpose, but is also used to extract information about market expectations and to provide benchmark rates against which to compare returns on fixed-income securities such as corporate and government bonds. This article explains what swaps are; what information might be extracted from them; and what appear to have been the main drivers of swap spreads in recent years. Some quantitative relationships are explored using ten-year swap spreads in the United States and the United Kingdom as examples. |
| Spring 2001 | Interpreting
movements in high-yield corporate bond market spreads
Credit spreads in the United States widened considerably during 2000, particularly in the high-yield bond market. Even indices of single-A and AA rated bonds widened in the last few months of the year. By contrast, with the exception of telecoms bonds, there was little evidence of widening in UK credit spreads. In this article we explain why US spreads widened, and assess the implications for the US macroeconomic outlook. |
