Analysing and Interpreting the Yield Curve, 2nd Edition

CHAPTER 8Yield Curve Analytics in the Post‐2008 Era

The bank crash of 2008 has been covered extensively in the business and financial literature, so there is no need for us to dwell on it here. What is worth considering is how yield curve analytics have adjusted to the changes in market conditions, some desired, some by regulatory legislative fiat, and some unintended, that have taken place since then. Whereas previously in essence, one was concerned with the sovereign bond yield curve, often referred to as the “benchmark” curve, and which itself was generally positively sloping and starting with a positive interest rate at the shortest tenor, today and for the foreseeable future there are other considerations to bear in mind. We look at these in detail in this chapter.

OVERNIGHT INDEX SWAP (OIA) YIELD CURVE¹

An important reference yield curve today is the overnight index swap (OIS) curve. (In the United Kingdom sterling markets, this is known as the sterling overnight index or SONIA curve.) This is similar to the conventional swap curve, except it references the overnight rate on the floating leg of the swap, compared to the three‐month or six‐month rate on the floating leg of a conventional swap. Prior to the 2008 crash, derivative pricing and valuations were based on the simple principle of the time value of money. A breakeven price was calculated such that when all the future implied cash flows were discounted back to today, the Net Present Value of all the cash flows ...