Chinese bond market: analysis of price information

Wang Jiang

State University Higher School of Economics Moscow

Contents:

2

• Chinese Bonds Market Overview

• Zero-coupon yield curve used by China Government Securities Depository Trust & Cleaning Co., Ltd

• Applying EFFAS-EBC methodology to Chinese bond market

Market overview

3

• About 3946 bonds with total worth 44 526,7 billion RMB issued since 1998

• Currently traded: 1912 bonds with outstanding amount 18 508 billion RMB

• About 1000 transactions a day with average daily turnaround about 160 billion RMB

• Bonds are traded at SSE, SZE, OTC and inter-bank markets

4

Market Structure

Market Structure

5

Outstanding Amount

6

1998

-12

1999

-12

2000

-12

2001

-12

2002

-12

2003

-12

2004

-12

2005

-12

2006

-12

2007

-12

2008

-12

2009

-12

2010

-04

02000400060008000

100001200014000160001800020000

Bil

lio

n

Source: http://www.chinabond.com.cn

Present Instruments

7

• Treasure Bonds (Ministry of Finance). All terms. Bullet redemption. Majority has coupons.

• Central Bank Bills (Peoples Bank of China). Very short and short term. Majority are discounted.

• Bonds Issued by Government-Owned BanksAll terms. Majority has coupons. Some have options.

• Corporate and Commercial Banks Bonds• Others

Non-Governmental Credit Bonds

8

2009 Bond Issuance Non-Governmental Credit Bonds

Source: Chinabond Source: Wind Info

Central Bank Bills

Policy Banks Bonds

T-Bonds

Corporate Bonds

Commercial Banks Bonds

Others

45.90%

13.50%

18.75%

18.23%

3.29%

0.33%

Current position:

9

• Chinese Bonds Market Overview

• Zero-coupon yield curve used by CGSDTC

• Applying EFFAS-EBC methodology to Chinese bond market

History of Yield Curves Development in China

10

Research Stage(1999-2001): The first treasury bond yield curve was created under the Discounted Cash Flow (DCF) method.

Development Stage (2002-2005): Four yield curves, i.e. Inter-bank Treasury Bond, Exchange Treasury Bond, Treasury Bond (compounded) and Floating interest rate Treasury Bond, and Indices for Treasury Bond (Inter-bank and Exchange) were worked out by CGSDTC. The method of quadratic polynomial was adapted at this stage .

Initial Application Stage (2006-now): CGSDTC has worked out a wide variety of yield curves and indices; the study and analysis for bond pricing are rapidly improved.

11

ChinaBond Yield Curve

Inter-bankMarket

Treasury Bond

Floating/Fix Rate

Central Bank Bill

Policy Bank Bond

Floating/Fix Rate

Corporate Bond

Floating/Fix Rate

Commercial Bank Bond

Floating/Fix Rate

Commercial Paper

ABS

Floating/Fix Rate

China Fixed-rate Treasury

Bond

ExchangeMarket

Treasury Bond

Corporate Bond

Chinabond yield curves structure

CGSDTC Current Methodology

12

• Data Filtering

• Expert and Historical Estimates

• Hermite Polynomial Fitting

Data Sources

13

• Deals Prices from OTC, Shanghai and Shenzhen Exchange markets

• Bid – Ask Quotes from Interbank market

• Market participants estimates

Data Filtering

14

In June 18, 2007 the data price contains T-bond 040007, YTM = 4.19, yield = 2.71%. The yield is much lower than the last working day (June 15, 2007). With the same YTM T-bond yield was 3.57% and 040007 is below the yield of 030007 (3.36%) with the YTM = 3.175 years. So, this data is anomaly.

• Fix bonds maturity dates as grid nodes

x = - YTM

• Fit Hermite polynomial such that:

a) Bond pricing equation holds

P – Bond price, A – Accumulative coupon income, F – Nominal bond price,

t – Moments coupon payment,

b) Yield expert estimates are recovered

15

Hermite Polynomial Fitting

Result of Matlab simulation

16

Current position:

17

• Chinese Bonds Market Overview

• Zero-coupon yield curve used by CGSDTC

• Preliminary study of the Chinese bond market

Data Sources

18

• Daily trading results

• Bid – Ask Quotes from 8 banks:

Industrial and Commercial Bank of ChinaAgricultural Bank of ChinaBank of ChinaChina Construction BankBank of BeijingChina Merchants BankChina MinSheng BankBank of Nanjing

19

Quotes co-Movement

20

Bid-Ask Spread co-Movement

21

Quotes: peculiarities

• Data contains errors: Bid > Ask• Quoted YTM corresponds to smth slightly less

than the Ask quote• Bid-Ask spread is far too wide• 4 banks quote all bonds, 4 banks quote only a

subset.

22

“Best” inter-bank Bid-Ask spreads

EFFAS-EBC meeting, June 2009 23

Quotes: Yield Curves

24

Quotes: (Bid+Ask)/2

25

Quotes: Summary

• Different banks use different quoting schemes: the way quotes move differs a lot

• Either quotes are non-committing or banks are isolated from each other: systematic arbitrage is present

• Bonds are likely to be quoted in groups by time to maturity.

26

Prices: peculiarities

• Highly illiquid market• Prices may lie well outside Bid/Ask quotes• Similar bonds are frequently priced unlike

each other• No filtering helps since “unusual” prices tend

to repeat in time

27

Number of Deals

28

Turnover

29

Price vs. Bid-Ask

30

Prices: Yield curves

31

More smoothing

32

Prices: Summary

• Data from different sources are likely to be mixed

• Yield curves should be constructed from quotes

• Extremely illiquid market, price information is unreliable