Study Of The Movement Law Of Bond Yield And Credit Spread In Chinese Bond Market

Firstly, we lead to the method of Merrill Clock Division of the economic cycle through reviewing the economic cycle theory. This method is direct and simple in practice, with which only two economic indicators, the CPI Price Index and the Industrial Added Value, are needed to determine the direction of the economic cycle roughly.The140monthly data used in this essay ranging from2002to2012, and was distributed into4recessions,3Recoveries,3Overheating periods and5Stagflations, based on the seasonal adjustment procedure and division principle.Based on the division of the economic cycle, we compared the bond yields and yield spreads in different economic cycles, and found out that there was a significant relationship between the bond yields, yield spreads and the economic cycle. We also found that the overall trend of the interest rate yields changed with the economic cycle, especially the one in mid-an long-terms. During the stage of Recession, the yield showed a downward trend, while in the Recovery, it showed an upward trend. Then in the Overheating stage, the slope of the term yield curve totally depended on the capital condition. During the Stagflation phase, the compromise between economic growth and inflation would decide the change of yield. The movement trend of interest rate yield and credit bond yield were almost the same. Though the credit spread changes sometimes, the movement of interest rate yield influenced the whole market. According to the relationship between bond yield, credit spread and economic cycle, we measured and compared the type of bonds in different economic phases by using investment return rate as the indicator. We discovered that, in the Recession, the duration was positively proportional to the rate of return, so the investor should increase the duration of portfolio and focus on long-term products, while during Overheating, the inverse proportion indicated that short-term product would lower the duration and have a better performance. However, the relationship during Recovery and Stagflation was not that significant. Besides, we found it obvious that stocks and bonds took turns to lead the market during Recession, Recovery and Overheating periods, but not in Stagflation phase. In the Recession, bonds beat stocks in general and long-term interest rate bond owned the highest return rate. In the Recovery, the good expectation on economy made investors focus on the stock market, while the bond was experiencing a bear market and the return rate would be negative. Then in the Overheating phase, the short-term credit bond had a positive rate of return, while the long-term bond was not a good choice. However, for the Stagflation, it was not conclusive though mid-and long-term bonds performed better than the short-term bond, since different types of mid-and long-term bonds hade various performances because of different economy and policy conditions.