Archive for the ‘Bonds’ Category

30/360 bond interest accrual question

Thursday, May 11th, 2006

A question I heard recently: Any bond traders out there that just love discussing interest accrual? Have a client disagreeing with me over number of days of interest paid on a bond. Issue settles 1/23/06 (long 1st cpn) and 1st pays 7/31/06. With a 30/360 SIA day count, how many days of accrued should be paid?

Many people answered 105 days, but a few calculated accrual like this:

106 days:
1/23/06 thru 1/31/06 = 9days
2/1/06 thru 5/8/06 = 97 days

The response to that calculation: I got 105, if it accrues 30/360, why does the 31st of January count in this scenerio?

The reason Jan. 31st would count: Since it would pay the 31st of Jan/July. SIA convention says treat 1/23/06 to 1/31/06 as 1 then 1/31/06 to 5/8/06, otherwise you lose a day of interest from 1/23/06 to 1/31/06…

The reason this is different is due to the passing of a “coupon date”. So you’d want to compute the number of days prior, then since coupon seperately. Not as if it was a period between coupons (like if it paid 1/20 & 7/20. So since this pays 1/31 & 7/31 (but they skip 1/31 cause an 8 day coupon is dumb), you split up the accruals.

this is something that people argue over constantly, even guys trading bonds for 20+ years. In case anyone cares, this is discussed in SIA Standard Securities Calculation Methods 1993, vol. 1, pages 17-35.

Inflation, Bonds, and the Fed

Sunday, February 20th, 2005

Alexandra Twin from CNNMoney has perhaps the clearest description of the bond problem:

Greenspan’s much-discussed “conundrum” as to why yields on long-term bonds have not risen despite the rise in short-term interest rate certainly woke up the bond market: Treasury bond prices tumbled for three sessions, pushing the yield on the 10-year note up to 4.26 percent from 4.08 percent. Treasury prices and yields move in opposite directions.

Rachel Beck from the AP writes about how the bond market rally was surprising everyone, including the Fed:

“For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum,” Greenspan told the Senate Banking Committee. “Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.”

Ros Krasny from Reuters shows that the Fed is unlikely to change its policy of measured increses in interest rates. The conclusion is that the Fed is very concerned with the bond market:

Greenspan’s concern about low long-term yields means the tail could wag the interest rate dog over the next few months, he said.

Normally fixed income dealers use the central bank’s views on Fed funds to make trading decisions in bonds. But the reverse may be taking place.

“The Fed does not control the long end of the curve but they find (current levels) hard to justify, so bond yields complicate matters a bit. If the 10-year yield (US10YT=RR: Quote, Profile, Research) rises back to 4.5 percent there is more chance the Fed will pause the funds rate at 3.25 percent,” Ruskin said.

My conclusion, which is based on a lot of reading, is that no one has any idea what’s going to happen to the bond market.