In recent notes, we presented the video history of forward rates and zero coupon bond yields for the U.S. Treasury curve (TLT) (TBT) (GOVT) (daily basis from 1962 through 2016) and the United Kingdom "gilt" curve (daily from 1979 through 2016).
In this note, we present a video of the zero coupon bond yields and quarterly forward rates for the Singapore government bond yield curve. The Singapore government bond market is unique in that the bonds are issued more for the sake of creating an interest rate price discovery mechanism than because of government financing needs. The source data from which these zero yields and forward rates have been extracted is the data published daily by the Monetary Authority of Singapore.
As with the U.S. and U.K. markets, a review of the video for the Singapore government yield curve shows that yield curve twists are much more common than the often used parallel shift stress tests of legacy interest rate risk management.
In another video, we present the Singapore government forward rate curve in tandem with the U.S. Treasury forward rate curve. The high degree of correlation between the two curves will surprise many, just as in the U.K.-U.S. case.
The curves shown are conditional on the yields provided by the Monetary Authority of Singapore being "true." The analysis uses all of the maturities provided by the Monetary Authority of Singapore. Kamakura Risk Manager ("KRM") version 8.1 was used to produce the Adams and van Deventer (1994, as corrected in van Deventer and Imai, 1996) maximum smoothness forward rates that perfectly price the yield curve provided by the Monetary Authority of Singapore. For more on forward rates and zero coupon bond yields, see van Deventer, Imai and Mesler. For more on "maximum smoothness" forward rates, please see the references.
Adams, Kenneth J. and Donald R. van Deventer, "Fitting Yield Curves and Forward Rate Curves with Maximum Smoothness," Journal of Fixed Income, 1994, pp. 52-61.
Andersen, Leif, "Discount Curve Construction with Tension Splines," Review of Derivatives Research, 2007, published online June 7, 2008.
McCulloch, J. Huston, "The Tax Adjusted Yield Curve," Journal of Finance 30, 1975, pp. 811-29.
Jarrow, Robert A. "Forward Rate Curve Smoothing," Annual Review of Financial Economics, Volume 6, 2014.
Mazano, Julian and Jorgen Blomvall, "Positive Forward Rates in the Maximum Smoothness Framework," Quantitative Finan ce, Volume 4, 2004, pp. 221-232.
Nelson, Charles R. and Andrew F. Siegel, "Parsimonious Modeling of Yield Curves," Journal of Business, Volume 60, Issue 4, October 1987, pp. 473-489.
Shea, Gary S., "Term Structure Estimation with Exponential Splines," Journal of Finance 40, 1985, pp. 319-325.
Svensson, Lars E. O. "Estimating and Interpreting Forward Interest Rates: Sweden, 1992-1994," Working Paper WP/94/114, International Monetary Fund, Washington, D.C., 1994.
van Deventer, Donald R. "Errata and Video Examples: 'Fitting Yield Curves and Forward Rates with Maximum Smoothness,'" Kamakura memorandum, March 6, 2017.
van Deventer, Donald R. and Kenji Imai, Financial Risk Analytics: A Term Structure Model Approach for Banking, Insurance, and Investment Management, Chicago: McGraw Hill, 1996.
van Deventer, Donald R., Kenji Imai and Mark Mesler, Advanced Financial Risk Management, second edition, John Wiley & Sons, Singapore, 2012.
Vasicek, Oldrich A. and H. Gifford Fong, "Term Structure Modeling Using Exponential Splines," Journal of Finance, May 1982, pp. 339-348.
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