Yourmentor

[Debt Series]

Session 4: Factors impacting Debt Markets


We are glad to have you with us for our 4th Session on Debt – (...and that is...) Factors impacting Debt Markets

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Factors Impacting Debt Markets


Debt markets are driven by host of factors that impact the sentiments of debt market investors, which in turn affect the market price of the securities and their yield.

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Monetary Policy and Interest Rates

  • The action taken by RBI in its monetary policy have significant impact on sentiments of debt market investors
  • The market values of the bonds are inversely affected by movements in interest rates.
  • In a rising interest rate scenario, the market prices of existing debt securities fall, as demand for new securities offering higher rates increases. With declining prices, the yields are brought into line with the prevailing rates.
  • In a falling interest rate scenario, the market prices of existing debt securities rise, as the higher rates on outstanding debt securities will be more valuable. Here, too, the market works to align the yields with prevailing rates.
Inflation

  • Fixed-income investors often focus on the real rate of return, or the actual return minus the rate of inflation.
  • Rising inflation has a negative impact on real rates of return, because inflation erodes the purchasing power of the future income from your investment.
  • In general, when inflation is on the rise, bond prices fall and
  • When inflation eases, bond prices tend to rise.
Credit Rating

  • The safety of principal of fixed-income investor's depends on the credit quality and ability of the issuer's to meet its financial obligations.
  • Credit Rating provided by credit rating agencies indicates the ability of the issuer to make timely interest payments and repayment of principal.
  • Higher the credit rating, the more likely an issuer is to meet its payment obligations. If the issuer's credit rating goes up, the price of its bonds will rise.
  • Issuers with lower credit ratings usually offer investors higher yields to compensate for the additional credit risk.
  • A change in either the issuer's credit rating or the market's perception of the issuer's business prospects will affect the value of its outstanding securities.


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