Gilt-Edged Market (eBook)

Cover 1
Contents 7
Foreword 13
About the Authors 15
Preface 17
Acknowledgements 19
1 The Gilt-Edged Market: An Introduction 21
2. A Primer on Bond Basics 31
2.1 Description 32
2.2 Bond issuers 34
2.3 World bond markets 37
2.4 Non-conventional bonds 38
2.5 Pricing a conventional bond 39
2.6 Clean and dirty bond prices 46
2.7 Market yield 49
2.8 Bond pricing and yield 54
2.9 The price/yield relationship 55
2.10 Duration, modified duration and convexity 58
3 The Gild-Edged Market I: Structure and Institutions 71
3.1 Market instruments 71
3.2 Taxation 77
3.3 Market structure 78
3.4 Market makers and brokers 78
3.5 Issuing gilts 80
3.6 The DMO and secondary market trading 84
3.7 Settlement 85
3.8 HM Treasury and the reit of the DMO 88
3.9 Exchange-traded gilt derivatives 89
3.10 The Minimum Funding Requirement 92
3.11 Developments in electronic trading 94
3.12 Market developments in 2001-2002 94
4 The Gilt-Edged Market II: Index-Linked Gilts 105
4.1 Index-linked gilts 105
4.2 Index-linked gilts analytics 112
4.3 Calculating break-even inflation 113
4.4 Duration matching 114
4.5 An implied forward inflation rate curve 117
4.6 The DMO's index-linked gilts redesign 118
5 The Gilt-Edged Market III: The Gilt Strips Market 127
5.1 Gilt stripts 127
5.2 Zero-coupon bond trading and strategy 135
5.3 Strips market anomalies 138
5.4 Trading strategy 139
5.5 Illustration: yield and cash flow analysis 144
5.6 Future developments in strips 147
6 The Gilt Repo Market 151
6.1 Introduction 151
6.2 The basics of repo 156
6.3 The classic repo 157
6.4 The sell/buy-back 160
6.5 Stock lending 161
6.6 Market structure 164
6.7 Gilt settlement and CREST/CGO 172
6.8 Repo netting and the LCH RepoClear system 174
6.9 Code of best practice 175
7 The Gilt Bond Basis I 177
7.1 An introduction to forward pricing 177
7.2 The LIFFE long gilt future 180
7.3 Futures pricing 183
7.4 The bond basis: basic concepts 186
7.5 Selecting the cheapest-to-deliver bond 198
7.6 Trading the basis 198
8 The Gilt Bond Basis II 203
8.1 Analysing the basis 203
8.2 Bond delivery factors 207
9 Information Content of the Gilt Yield Curve 213
9.1 Using the yield curve 213
9.2 Yield to maturity yield curve 214
9.3 The zero-coupon (or spot) yield curve 216
9.4 The forward yield curve 221
9.5 Analysing and interpreting the yield curve 227
9.6 Interpreting the yield curve 238
9.7 The DMO's yield curve model 241
10 The Art of Government Bond Trading 245
11 Approaches to Yield Spread Trading Using Gilts 251
11.1 Introduction 251
11.2 Coupon spreads 257
11.3 Butterfly trades 259
12 Being Some Reminiscenses of the Gilt Market 267
Glossary 273
Index 293