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How do you analyze bonds with different maturities?

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Bonds are fixed-income securities that pay periodic interest and return the principal at maturity. However, not all bonds have the same maturity, which means they have different exposure to interest rate risk, inflation risk, and liquidity risk. How do you analyze bonds with different maturities using technical analysis? Technical analysis is the study of price patterns, trends, and indicators to identify trading opportunities and evaluate market conditions. In this article, you will learn how to use some common technical tools to compare and contrast bonds with different maturities.

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Gayan Lakmal Alwis, CFA

I write about #Investing and #PublicSpeaking to make you a better person than yesterday.

1 Yield curve

The yield curve is a graphical representation of the relationship between the yield and the maturity of bonds with the same credit quality and currency. It shows how much investors demand to lend money for different time periods. A normal yield curve is upward sloping, meaning longer-term bonds have higher yields than shorter-term bonds. This reflects the higher risk and opportunity cost of locking up money for longer periods. A flat or inverted yield curve, on the other hand, indicates lower expectations for future growth and inflation, or higher demand for short-term bonds. Technical analysts use the yield curve to assess the overall direction and sentiment of the bond market, and to identify potential shifts in supply and demand.

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Gayan Lakmal Alwis, CFA

I write about #Investing and #PublicSpeaking to make you a better person than yesterday.
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One of the key factors influencing the shape of yield curve is the expectation of future interest rates. If - for example - investors believe interest rates are to fall significantly: - lenders will try to lend long-term to lock-in current high rates. This leads to a higher supply of long-term funds and lower supply of short-term funds. - conversely, borrowers will try to borrow short-term, so that the borrowing cost is repriced when rates do fall. This leads to a higher demand for short-term funds and a lower demand for long-term funds. Collectively, this leads to a fall in long-term rates and rise in short-term rates. If the shifts are large enough, this makes the yield curve downward sloping - known as "inverse yield curve".

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2 Price chart

A price chart is a visual display of the historical and current prices of a bond or a bond index. It can be plotted using different time frames, such as daily, weekly, or monthly, and different types of charts, such as line, bar, or candlestick. A price chart can reveal the trend, support, and resistance levels of a bond or a bond index, as well as the volatility and momentum. Technical analysts use price charts to spot patterns, such as triangles, channels, or head and shoulders, that can signal potential reversals or continuations of the trend. They also use technical indicators, such as moving averages, oscillators, or volume, to confirm or contradict the price action and to generate buy and sell signals.

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3 Spread analysis

Spread analysis is the comparison of the yields or prices of two or more bonds or bond indices with different maturities, credit ratings, or sectors. It measures the relative value and performance of different segments of the bond market. For example, the yield spread between a 10-year Treasury bond and a 10-year corporate bond reflects the risk premium that investors demand to hold the corporate bond over the risk-free Treasury bond. A widening spread indicates that investors perceive more risk or less demand for the corporate bond, while a narrowing spread indicates the opposite. Technical analysts use spread analysis to identify opportunities for arbitrage, diversification, or hedging, and to gauge the market sentiment and expectations.

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4 Duration and convexity

Duration and convexity are two measures of the sensitivity of a bond's price to changes in interest rates. Duration is the weighted average time it takes for a bond to pay back its cash flows, and it approximates the percentage change in price for a given change in yield. Convexity is the rate of change of duration, and it accounts for the curvature of the price-yield relationship. The higher the duration and convexity of a bond, the more responsive its price is to interest rate movements. Technical analysts use duration and convexity to estimate the potential gains or losses of a bond or a bond portfolio, and to adjust their exposure to interest rate risk. They also use them to compare the price behavior of bonds with different maturities, coupons, and features.

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Gayan Lakmal Alwis, CFA

I write about #Investing and #PublicSpeaking to make you a better person than yesterday.
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CORRECTION: The metric which provides an estimate of the price elasticity of a bond is called "Modified Duration (MD)". In simple words, if the MD is, say, 2.5, this means if interest rates fall (rise) by 1%, the bond's price will rise (fall) approx. by 2.5%. The metric which provides an estimate of the weighted average time is called "Macaulay Duration". Also, Mod. Duration = Mac. Duration/ (1 + YTM*) * Yield to Maturity, adjusted for the coupon payment frequency

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5 Relative strength index

Relative strength index (RSI) is a momentum indicator that measures the speed and magnitude of price movements of a bond or a bond index. It ranges from 0 to 100, and it indicates whether a bond or a bond index is overbought or oversold. Generally, an RSI above 70 suggests that a bond or a bond index is overbought and may be due for a correction, while an RSI below 30 suggests that a bond or a bond index is oversold and may be due for a rebound. Technical analysts use RSI to identify potential turning points and entry and exit points for trading. They also use it to compare the relative strength and weakness of bonds or bond indices with different maturities.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you analyze bonds with different maturities?

1

2

3

4

5

6

1 Yield curve

2 Price chart

3 Spread analysis

4 Duration and convexity

5 Relative strength index

6 Here’s what else to consider

Technical Analysis

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How do you analyze bonds with different maturities?

1

2

3

4

5

6

1 Yield curve

2 Price chart

3 Spread analysis

4 Duration and convexity

5 Relative strength index

6 Here’s what else to consider

Technical Analysis

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