Day: May 13, 2020

An update to fixed income markets, courtesy Vipul Singh Chouhan

Vipul Singh Chouhan, who I had the privilege of teaching about six years ago or so, has forgotten more about fixed income securities than I’ll ever know. Immediately after posting the previous post, I messaged asking if he would like to add to the list.

What follows are his recommendations, lightly edited for the sake of clarity. Thanks a ton, Vipul!

  1. Factsheets of all the Mutual Funds released on a monthly basis. I’ve linked to the Morningstar website, but I believe this is available through multiple sources. Here’s an actual factsheet, pulled out completely at random.
  2. Vipul recommends that you keep a close eye on the commentary of the Debt CIO on the current situation of the fixed income markets. See this, for one example.
    Specifically, Vipul recommends you try and get answers to the following questions:

    1. What are they holding?
    2. In what proportion?
    3. In what maturity bucket?
    4. What is the credit rating?
  3.  It doesn’t end there! After getting to know about the credit rating of a structure, read it.  For example, let’s say a particular CMBS (Commercial Mortgage Backed Security) is rated AA+ by India Ratings, go to the website and read the entire two page rationale. Then go and read rationales for similar CMBS structures – peer review, if you will. Poke around! Compare and contrast! Find faults!
    This next paragraph is quoted verbatim:

    “Pester someone like Ashish sir and tell him “Sir in my view this should be AA and not AA+, pls correct me if I’m wrong”. Take feedback from him and improve your analysis on a continuous basis. “

    Well, please don’t take up Vipul on this suggestion quite literally, but don’t ignore the larger point, which is that you must find for yourself a mentor in the subject area you are trying to learn more about, and bug that mentor about learning more. I assure you, this is a vastly under-rated, and under-exploited skill. By me as well, to be clear.

  4. Learn to look for patterns, and learn to connect the dots. This is easier said than done, and you need to bury your nose in these reports for weeks on end, but eventually, you’ll “get a feel” for what you’re looking for. Here’s an example from Vipul:

    In the fact sheet, find patterns, let’s say investment grade AUM has increased in the last few months, while the credit risk AUM has nose dived. Explore the internet for reasons.

    Maybe that didn’t make sense to you. Well, look up the terms and phrases, try to make sense of them, and then ask your mentor the question. The question should never be, “What is XYZ?”. It should be, “I didn’t understand this term, so I looked it up, and here is what I specifically don’t understand about XYZ.” Asking the right question is a great skill!

  5. Again, a straight quote, unedited:

    Among the various structures, which MFs buy what: LAS, CMBS, Corporate guarantee, Letter of Comfort, DSRA guarantee. Understand each in detail. Which structure is preferred by which issuer and for what reasons. Pros and cons of each structure.

  6. With regard to that last point, if you want to really be a part of the industry,  learn each of those terms, once again with a weighted average of research online and follow-up questions with your mentor. The internet will tell you what the terms mean, and your mentor will tell you why it matters. Both are important, and in that sequence.
  7. Vipul recommends that you browse RBI site regularly. Specifically, whether you understand the reports or not, look out for data on the following:
    1. Outstanding G-Secs
    2. Primary auctions of CMBs (s is small, not to be confused with the CMBS mentioned above)
    3. SDLs,
    4. T-Bills. 
  8. Government Securities Market for Beginners: A Primer, which I myself hadn’t read until now (Thanks Vipul!)
  9. And finally, FIMMDA for corporate bond spreads and base yield curve.

Akash (and anybody else interested in this topic), this should keep you busy for days on end. My thanks to Vipul for taking the time to respond so quickly, and for sharing a most excellent set of links 🙂

What should you read to learn more about fixed income markets?

Akash (I hope I got the spelling right, my apologies if I didn’t!) writes in to ask what he should read to learn more about fixed income markets. As he puts it, everything from basic to intermediate!

That might make for a long (and by definition) and somewhat less than comprehensive list, but the good news about a blog post is that it can always be edited! If anybody has additional links, send them along, and we’ll keep updating this post.

In terms of a very simple introduction to the topic, begin here. Very basic, very introductory, and therefore a good place to start. Wikipedia is a modern miracle, and an invaluable gift.

So, what very basic text should you begin with if you want to start learning about fixed income securities? More advanced folks might turn up their noses, but I think there is still something to be said for Investment Analysis and Portfolio Management, by Prasanna Chandra. Never trust my memory, but I think the fourth section deals with fixed income securities in India. If you are an absolute novice, begin there.

Ajay Shah and Susan Thomas have a book that is a very good introduction to financial markets in India in particular, and the book has two separate chapters on fixed income securities in India, one being devoted to the government securities market, and the other to the corporate bond market. Perhaps a little out of date now, but still worth a read.

I’ve not enrolled in, or finished either of the two courses on Coursera I am about to recommend right now. Nor is there any particular reason to recommend courses from Coursera alone. There are plenty of other online courses available. But I tried to put myself in the shoes of somebody who is just beginning their journey in this field, and selected courses from the Coursera website keeping this in mind. That led to the two courses below:

  1. Bonds and Stocks, by Gautam Kaul at the University of Michigan
  2. Introduction to Financial Markets, by Vaidya Nathan, at ISB.

As I mentioned, there is no reason to limit yourself to just Coursera, or just these courses. But these seem to be decent introductions. Here are two links to the syllabi of courses taught at the NYU Stern School of Business that deal with our topic:

  1. Debt Instruments and Markets, by Bruce Tuckman
  2. Debt Instruments and Markets, by Ian Giddy.

A useful thing to do is to go through the course outline, get yourself a copy of the textbooks they recommend, and try and read through the recommended course structure on your own. If you will allow me to be a bit heretical, might I suggest not worrying too much about not following everything all at once? Just read through it haphazardly, all higgedly-piggedly, and keep coming back every now and then to topics that seemed particularly abstruse. By the way, speaking of every now and then, have you considered spaced learning?

 

As a thumb rule, if you are interested in finance, always read everything written by Aswath Damodaran. Visit his homepage, click open whatever links grab your fancy, and read. I am not joking. Here are some blogposts to get you started:

  1. Dividend Yield and the T-Bond Rate.
  2. His favorite novels on financial markets.

All that besides, watch his videos, read his books, read his papers – be a greedy, greedy pig when it comes to devouring stuff written by him. My personal favorites are his attempts to value Uber and Tesla, but it is a long, long, long list.

 

 

Another useful resource is Ajay Shah’s blog. Again, some links to get you started:

  1. Difficult questions about the bond market.
  2. A presentation about developing the corporate bond market in India.
  3. A presentation about the bond-currency-derivative nexus.

I hope this helps, Akash – thank you for asking the question.