Meanwhile China is deflating - inflation's down to 2.4% from 4% in October.
This is quite deep in the doo-doo area for China, where people are unlikely to know what to do - most of the working population today has only seen a hugely growing economy, or at worst, a flat one. [Note: This is quite the same in India] A drop in fortunes is perhaps forgivable, but the current situation isn't a drop, it's a vapourization, so to speak.
Exports are down 2.2% - a figure that sounds docile, until you realize the recent past has seen 19% and 26% (in October 2008, and in 2007, respectively). Imports are down 15%. Little wonder then, that raw material exporters are suffering all over the world. It's so dire people are in disbelief, as a statement summarises:
"We've never experienced this before. We don't know what happened,"And still, there are predictions of 7.5% GDP growth. This is going to be quite remarkable if it is achieved - and not just for China, for India too, where the government "lowers" its target to 7.5%.
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>Please explain how gilt fund prices are inversely related to the interest rates. I'm a rank newbie to this, Low interest prices => Fewer people buying govt. bonds => They are less valuable.. where am I wrong?
12.12.08 at 9:24 PM
>Mohan: Demand for govt bonds is always high as they qualify for SLR and because they are the safest assets of all.
So when rates are decreased people will buy the bonds at a price that reflects a lower interest. If a 8% bond at 100 Rs. gives you Rs. 8 a year, an interest rates are down to say 6%, you would pay Rs. 130 or so fr the same bond (because Rs. 8 is about 6% of 130)
12.13.08 at 4:41 AM
>Very strong! I wasn’t clear on how the price changed, now I am. Thanks a ton!
So my price will be 100/(New rate/Original rate). That explains the (super)exponential inverse dependence, too.
So if you’re sure there’s going to be a rate cut, you stock up on gilt funds. Neat!
12.13.08 at 8:00 AM
>And look at the price differential – a 2% drop in yield (8% to 6%) causes a 30% rise in price!
US bonds have gone up some 40% since Mid 2008, I think.
On the other side, you can’t short treasuries in India (though banks and FIs can, through CLBO, sort of) so you gotta ride up increasing interest rates only with a floater or something.
12.13.08 at 8:04 AM
>But this is incredible! In Jan 2007, the US rate was 5.25%. It's now 1%. That means I'd have a return of 100/(1/5.25) 525% !
Shorting the S&P from it's highest of 1552 in that period would have given me only (1552-873)/1552 == 43% !
Is this actually true, or am making a silly mistake somewhere?!
12.14.08 at 4:24 AM
>Mohan, I didn”t see you had a formula in there. The funda of bond prices is more complex: check out this link.
12.14.08 at 7:28 AM
>Ah ok, I see it now. Thanks!
12.14.08 at 8:05 AM