URGENT: bond price differences due to currency dollars, interest, currency, industrial

sdada

Hi all,

Can anyone please provide me with a good reason as to why when in bloomberg I look at the yield curve for US industrial bonds in USD as opposed to when I change them to say Australian dollars, the interest rates on the yield curve change so much??

Thanks in advance. I think I know why, but finding it really hard to express!!

genuinecfa

currency risk?

bolligerallstar

Most likely reflecting the yield of similar bonds issued in Aussie Dollars. Aussie yields are much higher than US yields.

LPoulin133

its because of interest rate parity, just wanted an easier way to describe it.

bleach

ARBITRAGE!

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soverby

It's because of forward exchange rates. Let's say you have two zero coupon US treasuries: one expires in 1 year and the other expires in 2 years. Let's then say that AUD is expected to appreciate relative to USD between year 1 and year 2.

Due to the expected depreciation of the AUD, you expect to receive a lower payoff in AUD at the end of year 2 compared to year 1. That is, since AUD is expected to be worth more at the end of year 2, you receive fewer AUD for the same amount of USD.

As a result, the US treasury curve in AUD will be less upward sloping than the USD curve.

I guess you could also explain this in terms of interest rates, but I find forward exchange rates to be a bit more direct.

Andreas42

double post



Edited 1 time(s). Last edit at Tuesday, June 14, 2011 at 09:04AM by ohai.