It is a Confidence Indicator which is calculated by dividing the average yield of X number of high grade bonds on Y number Intermediate/low grade bonds. It is most often used in corporate bonds to gauge investor sentiment. Let’s start with an example.
Let’s say we calculated average yield of 10 AAA rated papers (no option) and 10 A rates papers of 10Y maturity. AAA average yield came in at 8% and A average yield came at 9.5% then confidence index will be calculated as follows:
BCI = (8/9.5)*100 = 84
One can debate why to calculate and get into complexities when we already have spreads. The crux is even if spread is same for two situations, BCI can be different. See below…
Higher the level of BCI better is the bond market sentiment and vice versa. The simple theory is when traders are on risk on they are likely to invest in speculative papers.
The reason I mentioned X and Y is because experts may believe to take varied number of bonds for their calculation. Rising BCI is also considered positive for stocks and the same shares a positive correlation with equity markets.
In Indian context BCI is hardly used or say rather hardly published.
More about Kush Sonigara on Google+