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Provide an essay for article examines the changing nature of the models that are used to value bonds. According to the authors of this article, the global bond market can no longer be predicted using the old bond valuation methods.
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#$100 Trillion Bond Market Renders Models Useless Essay
The article is titled “Unstoppable $100 Trillion Bond Market Renders Models Useless” and it is jointly authored by Dave Liedtka and Susanne Walker. The article examines the changing nature of the models that are used to value bonds. According to the authors of this article, the global bond market can no longer be predicted using the old bond valuation methods. The article appears in the June online edition of “Financial Press” and it encompasses views from several financial experts. The article also uses examples from some of the leading world economies such as Japan, the United Kingdom, and the United States.
The authors of this article begin by noting that the Federal Reserve Bank of New York has reevaluated the methodologies that it uses to estimate the yields on bonds. The fact that the earlier methods of estimation have failed to work is the main reason behind this reevaluation. The article also notes that the Fed and central banks have stimulated the global bond market to a tune of $100 trillion. This stimulation has made it difficult for financial analysts to predict the outlook of the bond market. One of the cited incidences of flawed bond market prediction involves campaigns by central banks. These campaigns have sought to assure investors for profitability of the bond market.
The article refers to current data and statistics that indicate that the global average return on bonds stands at 3.89 percent. On the other hand, the average return on 10-year bonds stands at 2.48 percent. The disparity between these rates is a testament of how unpredictable the bond market has become. The New York Fed has updated its metric of predicting the productivity of 10-year bonds. The new strategy excludes all human-based predictions and only factors in the market prices.
The authors of this article argue that even if most investors predict minimal yields on bonds, they are forecasting that borrowing costs will increase as the economy gains momentum. The yield of 10-year bonds is estimated to reach 3.25 percent in 2015. It is also noted that the United States’ interest rates have been near-zero over the last six years. This development has led to complacency among bond investors due to the low yields on bonds. Therefore, it is concluded that the United States treasury bonds are relatively expensive. The article quotes one investment expert who claims that “the treasury market is overvalued” (Liedtka and Walker 1). Central banks and the Fed are floating colossal amounts of money into the economy making it hard for financial analysts to predict the outcomes of the short-term bond market. The article also notes that the benchmark rates of the major economies stand at less than 1 percent. The Fed representatives attribute the current low benchmark rates to high unemployment rates and rising inflation. However, the authors of this article note that the bond market is still a viable investment avenue because it cautions investors against inflation and a waning global economy.
This article relates to most of the subject matters that were covered in class involving interest rates, bond valuation, and market drivers. Chapter six of “Essentials of Corporate Finance” contains several matters that are addressed by this article. For instance, the book contains a section on market drivers that outlines how risks and inflation rates influence investors’ choices (Westerfield, Ross and Jordan XXXX). In addition, chapter six also contains subtopics about bonds’ characteristics and their valuation methodologies.