Generic Bond Yields: Rolling Bonds Versus Fitted Curves
Summary
The document explains two ways to construct a constant-maturity sovereign bond yield series. A rolling series records the yield of whichever specific bond is currently designated on-the-run for a maturity. When the benchmark bond changes, the series can jump because the replacement bond has different features, such as coupon, issue size, or contractual terms. Such jumps can distort time-series analysis because they do not necessarily represent a market move.
The alternative is to fit a bond curve to available securities each day and read the yield for a hypothetical bond at the desired maturity and coupon. This approach can interpolate across sparse issuance and avoid abrupt benchmark-switch effects. It depends on a suitable curve-fitting model, solver, and chosen coupon specification, which is arbitrary; incorporating bond-specific features also adds complexity. The answer says Bloomberg uses neither described approach, but offers no further details on its methodology. The discussion is conceptual and does not provide empirical comparisons or implementation guidance.
Key ideas
- A rolling constant-maturity series follows the current on-the-run bond for each maturity.
- Switching benchmark bonds can create yield jumps unrelated to underlying market movement.
- A fitted curve can provide yields for hypothetical bonds at specified maturities and coupons.
- Curve-based yields require modeling choices, including an arbitrary coupon specification, and can be harder to calculate.
- The document does not explain Bloomberg's alternative methodology.
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# Generic bond yields # Generic bond yields I was looking on historical sovereign bond yields for a project. I was wondering what is meant by "generic bond yields" mentioned on bloomberg. Somewhere else i found data about the same country but not entitled as "generic". Could someone please share his knowledge on the matter? ## Answer by Attack68 (score 2, accepted) https://quant.stackexchange.com/a/38644 When dealing with bonds and constant maturities there are two process that can be used: Continually rolling the '10Y index' bond This means that you record the yield for whichever specific bond is classified as the 'on-the-run' 10Y at that point in time. That bond will continue to be sampled for some amount of time, e.g. 2-6mths and then a longer bond will become the on-the-run 10Y and that will be recorded instead. This causes problems with time-series analysis since the changeover day will correspond to a discrete jump that reflects the 'spread' between the two bonds which is not actually market movement but instead due to the underlying characteristics of the different bonds, high coupon vs low coupon, CAC terms, coupon payment months, issue size, free float etc. etc. Calculating from a Bond Curve Another method is to generate a best-fit bond curve which fits all the bonds on the curve for a given day and then sample the YTM of a generic (virtual) bond from it, i.e. a 10Y 2% coupon bond. This is my preferred way of doing it since it avoids the problem above, but has its own problems. Firstly it requires a good curve building model which takes many things into account (new issues, different bond characteristics) and the numerical solver can be difficult to program. This can be better for countries or credits which have sparse bonds since you interpolate and produce a better 10Y point. It also relies on a defined coupon specification for the 10Y which is arbitrary. Bloomberg does not use this methods due to its lack of transparency and additional complexity.
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