Abstract
AbstractIn this paper, we investigate how the 5‐year Swedish municipal bond yield has been related to the corresponding yield on government bonds during the period that the Riksbank has conducted unconventional monetary policy in terms of bond purchases. Using daily Swedish data on bond yields from February 2015 to January 2018, we first conduct an event study to assess the short‐run effects of the Riksbank's bond‐purchase announcements. We then estimate bivariate vector autoregressive models to study the dynamic relationship between the yields. Results from the event study suggest that the accumulated short‐run effect of the Riksbank's announcements was to lower the government bond yield by approximately 40 to 50 basis points and municipal bond yields by 30 to 35 basis points. Our vector autoregressive analysis indicates—in line with the event study—that an unexpected decrease in the government bond yield initially increases the municipal bond‐yield spread. However, after approximately 4 weeks, the effect has been reversed and the municipal bond‐yield spread is lower than it was initially. By conducting this analysis, we contribute to the understanding of the transmission of unconventional monetary policy.
Highlights
The international recession that followed the global financial crisis was unusually deep
We argue that the full effect on municipal bond yields seems likely to come with a bit of a delay since it is reasonable to assume that different government bonds are closer substitutes to each other than what a municipal bond and a government bond are
We find that accumulated effect based on all events is -49 basis points for the government bond yield and -37 basis points for the municipal bond yield
Summary
The international recession that followed the global financial crisis was unusually deep. We provide further empirical evidence on the relationship between yields on bonds which have not been subject to purchases by the central bank and yields on government bonds It complements international studies such as those mentioned above, as well as Swedish studies focusing on different types of assets – see, for example, De Rezende et al (2015) and Sveriges Riksbank (2017a) – and adds to our understanding of how unconventional monetary policy works. If no bank has reported a price we use Bloomberg’s generic prices (BGN) or Bloomberg’s evaluated pricing service (BVAL) To these data, we estimate yield curves for both Kommuninvest of Sweden and the Swedish government based on the model of Nelson and Siegel (1987) and evaluate the respective five-year yields.. Estimation is based on the standard model of Nelson and Siegel (1987), not related extensions such as, for example, those of Svensson (1995) or Diebold et al (2006)
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