25 ways to understanding bond markets
New to bond markets or market commentary? This glossary breaks down key terms like bid-cover ratio, yield curve, and duration in plain language - helping you follow and understand Impala Market’s insights with confidence. Bookmark it and refer back anytime.
Bid-Cover Ratio
Definition:
A measure of demand in an auction, calculated as the total value of bids received divided by the amount of bonds or bills offered.
Why It Matters:
It signals investor appetite.
A higher bid-cover ratio means strong demand (more bidders than supply).
A lower ratio implies weak demand or risk aversion.
Example:
If UGX 200 billion in bids are received for UGX 100 billion on offer, the bid-cover ratio is 2.0x.
Carry Trade
Definition:
A strategy where investors borrow in a low-yielding asset (e.g., cash or short-term bills) and invest in a higher-yielding asset (e.g., long-term bonds), profiting from the difference (“carry”).
Why It Matters:
Carry trades influence demand along the yield curve and are sensitive to interest rate expectations. If rates are expected to fall, carry trades become more attractive.
Example:
Borrowing at 10% (short-term) and buying a 2-year bond yielding 15% creates a 5% “carry”.
Yield Curve Steepness
Definition:
A description of the slope between short-term and long-term yields on government bonds.
Types of Curves:
Steep curve: Long-term rates much higher than short-term (signals economic growth expectations).
Flat curve: Similar yields across maturities (uncertainty or transition period).
Inverted curve: Short-term yields higher than long-term (often signals recession risk).
Why It Matters:
Helps investors interpret future interest rates, inflation, and economic activity.
Example:
If the 1-year bond yields 12% and the 10-year yields 17%, the curve is steep. If both yield ~14%, it's flat.
Duration
Definition:
A measure of a bond’s sensitivity to interest rate changes. It’s expressed in years, but it’s not the same as maturity.
Types:
Macaulay Duration: Time-weighted average of cash flows.
Modified Duration: Price sensitivity to a 1% change in yield.
Why It Matters:
Long-duration bonds lose more value when rates rise. It’s key for managing interest rate risk.
Example:
A bond with 7-year duration will lose ~7% in value if rates rise by 1%.
Reinvestment Flow Rotation
Definition:
The practice of re-investing proceeds from maturing bonds (principal + interest) into new government securities, often influencing demand.
Why It Matters:
This rotation creates natural demand in the market and can boost auction subscription or secondary market activity. Reinvestment peaks can compress yields temporarily.
Example:
If UGX 500 billion of bonds mature in July, and investors re-invest those funds in July auctions, bid-cover ratios may rise.
Primary Market
Definition:
Where government bonds and bills are first issued, typically via auction by a central bank or debt office.
Why It Matters:
This is where price discovery begins. Trends in the primary market influence the broader interest rate environment.
Secondary Market
Definition:
Where bonds and bills are traded after issuance, between banks, investors, and other market participants.
Why It Matters:
Secondary market prices affect portfolio valuations, trading liquidity, and market sentiment.
Off-the-Run vs On-the-Run Bonds
On-the-Run: Most recently issued bonds.
Off-the-Run: Older issues with the same maturity.
Why It Matters:
On-the-run bonds are more liquid and serve as benchmarks. Off-the-run may offer better yields but are less traded.
Yield (or Effective Yield)
Definition:
The return an investor earns on a bond, accounting for price and coupon.
Why It Matters:
Yield is a more accurate return measure than coupon rate, especially when bonds are trading at a discount or premium.
Coupon Rate
Definition:
The fixed interest payment a bond pays annually, as a percentage of face value.
Why It Matters:
Determines income earned but doesn’t reflect market value or return if bond is bought at a different price.
Benchmark Bond
Definition:
A specific bond used as a reference point for market pricing (often the most liquid or most recent issue in a tenor).
Why It Matters:
Changes in benchmark yields drive overall market pricing and sentiment.
Tenor
Definition:
The length of time to bond maturity (e.g., 91-day, 2-year, 10-year).
Why It Matters:
Different tenors reflect varying expectations about interest rates, inflation, and fiscal policy.
Liquidity
Definition:
The ease with which a bond can be bought or sold without affecting its price.
Why It Matters:
High liquidity attracts more investors and tighter spreads. Low liquidity can widen bid-ask spreads and make exits harder.
Auction Cut-Off Yield
Definition:
The highest yield accepted by the central bank in an auction. It becomes the reference rate for the issued security.
Why It Matters:
Signals where government was willing to borrow, influencing investor expectations.
Bid vs Offer (or Ask)
Bid: What buyers are willing to pay.
Offer (Ask): What sellers are willing to accept.
Why It Matters:
The bid-offer spread indicates liquidity and trading interest. A narrow spread means high activity; a wide one means uncertainty or illiquidity.
Mark-to-Market
Definition:
Valuing a bond at current market price, rather than original cost.
Why It Matters:
It affects reported portfolio returns, risk exposure, and financial statements.
Flight to Safety
Definition:
A shift of investor funds from riskier assets (like equities or corporate bonds) to safer ones (like government securities).
Why It Matters:
Often triggered by political risk, market volatility, or global shocks. It drives bond yields lower due to surge in demand.
Roll-Down Return
Definition:
Extra return earned when a bond’s yield falls as it approaches maturity along a steep yield curve.
Why It Matters:
It rewards investors who hold mid- to long-term bonds during a falling rate environment.
Auction Calendar
Definition:
A published schedule of when government securities will be issued via auction.
Why It Matters:
Allows market participants to plan investments, assess reinvestment windows, and manage liquidity.
Yield Compression / Spread Compression
Definition:
A narrowing of yields or interest rate spreads between different bond tenors or issuers.
Why It Matters:
Often reflects declining risk premium or improving credit outlook, but can also signal overheating markets.
Fiscal Risk
Definition:
Risk that a government’s borrowing or spending patterns may lead to unsustainable debt or default, affecting investor appetite.
Why It Matters:
Fiscal stress tends to raise bond yields and reduce bid-cover ratios.
Inflation Risk
Definition:
The risk that inflation will erode the real returns of a bond.
Why It Matters:
Higher inflation expectations push yields higher as investors demand more compensation.
Repo (Repurchase Agreement)
Definition:
A short-term borrowing arrangement using government securities as collateral.
Why It Matters:
Used by banks for liquidity, and central banks to control money supply and short-term rates.
Debt Sustainability
Definition:
The government’s ability to meet its current and future debt obligations without resorting to excessive borrowing or default.
Why It Matters:
Impacts market confidence and yield trends.
Auction Overhang
Definition:
When upcoming bond auctions are expected to increase supply, reducing prices in the secondary market ahead of the auction.
Why It Matters:
Traders may sell or price bonds lower in anticipation, pushing up yields temporarily.
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Thank you, I needed this one they keep sending me newsletters with market updates from the bank and I am clueless
thanks superstar