Bond Yield Changes Research Articles

U.S. macroeconomic news and low-frequency changes in bond yields in Canada, Sweden and the U.K.

This paper investigates the importance of U.S. macroeconomic news in driving low-frequency fluctuations in the term structure of interest rates in Canada, Sweden, and the U.K. We follow two complementary approaches: First, we apply a regression-based framework that aggregates the impact of daily macroeconomic news on bond yields to a lower quarterly frequency. Next, we estimate a macro-finance affine term structure model linking the daily news to lower-frequency changes in bond yields and its expectations and term premia components. Both approaches show that U.S. macroeconomic news is an important source of lower-frequency quarterly fluctuations in bond yields in these open economies, and even more important than their respective domestic macroeconomic news. Furthermore, the macro-finance model shows that U.S. macroeconomic news is particularly important in explaining low-frequency changes in the expectation components of the nominal, real, and break-even inflation rates.

Modeling Extreme Events: Time-Varying Extreme Tail Shape

We propose a dynamic semiparametric framework to study time variation in tail parameters. The framework builds on the Generalized Pareto Distribution (GPD) for modeling peaks over thresholds as in Extreme Value Theory, but casts the model in a conditional framework to allow for time-variation in the tail parameters. We establish parameter regions for stationarity and ergodicity and for the existence of (unconditional) moments and consider conditions for consistency and asymptotic normality of the maximum likelihood estimator for the deterministic parameters in the model. Two empirical datasets illustrate the usefulness of the approach: daily U.S. equity returns, and 15-min euro area sovereign bond yield changes.

Macroeconomic News in Asset Pricing and Reality

ABSTRACTRevisions in successive Greenbook forecasts of quarterly real GDP growth proxy for news of current and expected future economic growth. In the sample 1975 through 2015, news of future growth is slightly negatively related to contemporaneous changes in Treasury bond yields, while news of current growth is strongly positively related to changes in these yields. Both results are difficult to reconcile with a representative agent's bondholding first‐order condition. A continuous‐time dynamic model of output attributes almost all of the covariation with yields to martingale innovations in log output and a minimal amount to innovations in the conditional drift of log output.

Determinants of Indonesian Government Bond Yields

An important factor that becomes a consideration for investors in purchasing bonds as an investment instrument is the bond yield. Bond yields are used to calculate how much income the investors will get in a certain period of time. The yield movement can be influenced by various factors. This study aims to analyze the effect of bond prices, BI rate, inflation, and exchange rates on medium-term (10 years) and long term (30 years) Indonesian government bond yields. Data used in this research were monthly time series data from January 2015 to December 2019. The time-series data were analyzed by VAR/VECM. The results of the study found that bond price had a significant negative effect on medium term and long term government bond yields. The interest rate had a significant positive effect on long term government bond yields and the exchange rate had a significant positive effect on medium term government bond yields. Inflation had no significant effect on medium and long term government bonds yields. The exchange rate made the greatest contribution to medium term government bond yield changes while long term government bond made the greatest contribution to bond prices. Keywords: BI rate, bond prices, exchange rates, inflation, bond yields

Secular Changes in Bond Yields

We build a model for bond yields based on a small-scale representation of the economy with secular declines of inflation, real rate and output growth. Long-run restrictions identify nominal shocks that influence long-run inflation but do not influence the long-run real rate and output growth. These nominal shocks have loadings that can change over time. The results show that, before the anchoring of inflation around the mid-1990s, nominal shocks lifted the output gap and inflation leading to higher yields and a steeper yield curve via higher short-rate expectations and the term premium. The short rate peaked after several quarters, only after the responses of growth and inflation started to decline. With inflation anchored, however, nominal shocks have a short-lived impact on inflation, insignificant impact on output and only a small impact on bond yields via the term premium.

The evolution of European bailout arrangements and its impact on sovereign bond yields in the aftermath of the euro crisis

AbstractThe 2010–2012 euro crisis prompted a wave of institutional reforms in the European Economic and Monetary Union (EMU), and one of the most remarkable changes was the creation of a permanent bailout facility for troubled sovereigns. The birth of the European Stability Mechanism (ESM) in 2012 was preceded by harsh debates, reflecting a conflict between a German view of country-level responsibility and French-Italian calls for more risk sharing. These tensions have remained ever since, which was also highlighted by conflicts regarding the ESMs overhaul at the end of 2019. Concerns of Italy then drew attention to the fact that a wide range of issues prevented the community from finalizing the post-crisis structure of the eurozone. This paper focuses on the evolution of the EMU financial assistance framework up until the latest efforts for its reform. We analyse the impact of related policy announcements on changes in sovereign bond yields of Italy, Spain, Portugal and Ireland (i.e. the most vulnerable countries during the euro crisis). Our findings show that news on bailout arrangements significantly contributed to a contemporaneous moderation of periphery bond yields, especially in the case of shorter maturities. This result hints at the role of common facilities in supporting financial stability. To enhance this feature, a ‘package approach’ (i.e. multiple reforms together, as stressed by Italy) may well need to be considered. Such a broad perspective can help strengthen the euro area once the acute threat of the coronavirus pandemic is averted.

US Macro News and Low-Frequency Changes in Small Open Economies Bond Yields

US Macro News and Low-Frequency Changes in Small Open Economies Bond Yields

Liquidity in Asian Financial Markets: Crowding Out or Spillover Effect

The paper attempts to explore the relationship between the stock market and the corporate bond market, with a focus on the inter-dependency of liquidity between the two markets. The study employs a panel dataset to assess the impact of stock market liquidity on the corporate bond market liquidity for top five Asian economies (ranked by GDP) for the period 2008-2017. In contrast to limited number of earlier studies that reported a spillover effect of liquidity among the markets for stock and government bonds, the results of the present study convey that an increase in stock market liquidity tends to eat up the liquidity of the corporate bonds, even after controlling for government bond yield and inflation rate changes. The findings indicate a crowding out effect instead of a spillover effect, as indicated by related studies. The ‘flight-to-quality’ argument provides one possible explanation of liquidity moving away from one market to the other. This has an implication that if regulators’ policies are focused in developing only one type of market, it may crowd out the liquidity and the development of the other market. The study suggests the government to focus more on corporate bond market, which is yet to flourish in the Asian markets as compared to its stock market counterparts. The paper is one of the few attempts that focus on the corporate bond market and its liquidity and aims to ignite a debate on the possible linkages between liquidity of corporate bond market and the stock market.

Policy uncertainty in Australian financial markets

Economic policy touches most facets of corporate decision-making and variations in policy can elicit significant changes in financial performance and asset prices. We utilize the economic policy uncertainty (EPU) measure of Baker et al. to investigate the extent to which policy uncertainty influences Australian financial market returns. Our empirical results demonstrate that both domestic and global uncertainty have a significant negative impact on excess stock returns, changes in bond yields and Australian dollar (AUD) returns. The relationship is concentrated in the left tail of the return distribution and largely driven by increases in policy uncertainty. Although the identified relationship is negative throughout the sample period, the magnitude of the relationship appears to be state dependent and is influenced by periods of high uncertainty, recession and the lead-up to federal elections. The most plausible explanation for our results is that uncertainty about economic policy is channelled to financial markets via the discount rate effect, resulting in a higher risk premium. Our results are important for investors, corporate managers and policy makers wishing to navigate periods of policy uncertainty. JEL Classification: G10, G12, G14, G15

Granger causal relationship between bond yield changes and equity returns through wavelets analysis: the case of Turkey

This paper re-examines the stock-bond relationship in Turkey by using weekly price observations of stock indices and interest rates over a sample period between 2005-04-01 and 2016-12-30. Considering heterogeneity investment periods, we employed both standard and wavelets methods to provide a deeper understanding. The findings suggest the presence of unit roots in our variables at the level and reveal evidence of the cointegration and a one-way causal relationship in the long-run. Given that the conventional time-domain tests document insignificant results, we employed causality tests on the decomposed series to unearth the true dynamics of causal linkages. Furthermore, the empirical results support the presence of bi-directional causality between the fluctuations in bond yields and equity returns, i.e. they are significant predictors of each other in the medium and long time horizons. The empirical results pertinent to asymmetric causality tests show a one-way causality from the negative shocks in stock prices to the positive shocks in interest rates. Specifically, the results of frequency causality test reveal that the predictive power of the financial index returns on the interest rate changes intensifies across frequencies.

The macroeconomic factors affecting government bond yield in Indonesia, Malaysia, Thailand, and the Philippines

The government bond (GB) has become the most attractive investment portfolio option, even though many macroeconomic factors affect the bond yield. This paper aims to investigate the determining factor of local currency government bond yield by considering the inflation rate, credit default swap, stock market index, exchange rate, and volatility index. This study used 240 data panel from the Bloomberg stock market in the form of data panel covering Southeast developing countries, namely Indonesia, Thailand, Malaysia, and the Philippines, for five years or sixty months from January 2015 to December 2019. Data analysis used recursive models and multivariate regression techniques using EViews software. The random effect model results revealed that change in the foreign exchange rate and volatility indexes affected, partially and simultaneously, the changes in the stock market index. The result also showed that changes in the stock market index, inflation rate, and credit default swap affected, partially and simultaneously, government bond yield changes. These results suggest that the government bond yield could be managed by controlling volatility index, foreign exchange rate, stock market index, inflation rates, and credit default swaps. This finding could provide an insight into the policymaker and fiscal authority on managing the risk of government bonds under control during high volatility or even making it reasonably lower. This result could contribute to the current research in the field of financial management. Acknowledgment It is the author’s pleasure to thank Muhammad Aulia SE MSc CSA® from the Ministry of Finance of Republic Indonesia, for his invaluable contribution to encourage this study and also to share the data required for this paper. He also delivers essential insights into improving the quality of this work. This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Value and Interest Rates: Are Rates to Blame for Value’s Torments?

Value stocks sharply underperformed growth stocks from 2017 to early 2020, exacerbating a longer period of lackluster performance that dates back to the Global Financial Crisis for some value factors. Some have blamed the interest rate environment – the low level of interest rates, falling bond yields or the flattening yield curve. We examine these claims. Theory suggests the link between value and interest rates is ambiguous and complicated. Empirically, we find fairly modest links that change for different specifications. Evidence of a mild relationship between interest rate variables and value’s performance is found for some specifications, but not others. Despite some eye-catching patterns in recent data, particularly those related to changes in bond yields or the yield curve slope, the economic significance of any relationship is small and not robust in other samples. We conclude that the performance of value is not easily assessed based on the interest rate environment, and that factor timing strategies based on interest rate-related signals are likely to perform poorly.

Policy Uncertainty in Australian Financial Markets

Economic policy touches most facets of corporate decision-making and variations in policy can elicit significant changes in financial performance and asset prices. We utilise the EPU measure of Baker et al. (2016) to investigate the extent to which policy uncertainty influences Australian financial market returns. Our empirical results demonstrate that both domestic and global uncertainty have a significant negative impact on excess stock returns, changes in bond yields and AUD returns. The relationship is concentrated in the left tail of the return distribution and largely driven by increases in policy uncertainty. Although the identified relationship is negative throughout the sample period, the magnitude of the relationship appears to be state dependent and is influenced by periods of high uncertainty, recession, and the lead-up to federal elections. The most plausible explanation for our results is that uncertainty about economic policy is channelled to financial markets via the discount rate effect, resulting in a higher risk premium. Our results are important for investors, corporate managers, and policy makers wishing to navigate periods of policy uncertainty.

Modeling Extreme Events: Time-Varying Extreme Tail Shape

A dynamic semi-parametric framework is proposed to study time variation in tail fatness of sovereign bond yield changes during the 2010--2012 euro area sovereign debt crisis measured at a high (15-minute) frequency. The framework builds on the Generalized Pareto Distribution (GPD) for modeling peaks over thresholds as in Extreme Value Theory, but casts the model in a conditional framework to allow for time-variation in the tail shape parameters. The score-driven updates used improve the expected Kullback-Leibler divergence between the model and the true data generating process on every step even if the GPD only fits approximately and the model is mis-specified, as will be the case in any finite sample. This is confirmed in simulations. Using the model, we find the ECB program had a beneficial impact on extreme upper tail quantiles, leaning against the risk of extremely adverse market outcomes while active.

Bond Yield Changes and the Cross-Section of Global Equity Returns

Bond Yield Changes and the Cross-Section of Global Equity Returns

Determinants of Bond Rating and its Implications to Corporate Bond Yield

Identifying the factors that affect bond ratings is important in relation to investment decisions in long-term debt securities because they have an impact on corporate bonds. The research objective is to analyze the factors that influence bond ratings and their implications for corporate bond yields, both partially and simultaneously. This study uses a logistic regression model to estimate the determinants of corporate bond ratings and a panel data regression model to estimate the implications for corporate bond yields, by taking samples of corporate bonds listed on the Indonesia Stock Exchange (IDX) during the 2012-2016 period with a number of samples research with as many as 36 corporate bonds. Based on the results of the study, using the logistic regression method, the following research findings were obtained: company size, liquidity, leverage and profitability simultaneously affected bond ratings with a contribution of 33.62% (R2 ). In addition, the size and liquidity of the company have a positive and significant effect on bond ratings. While the results of the panel data regression analysis, it was found that company size, liquidity, leverage, profitability and bond rating simultaneously affected bond yields with a contribution of 70.4% (R2) while 29.6% was influenced by other variables. In addition, the size and leverage of the company has a negative and significant effect on the yield of corporate bonds. This study also shows that the larger the size of the company, the less sensitive the changes in bond yields and vice versa, the smaller the size of the company, the more sensitive it is to changes in corporate bond yields.

A Markov Regime Switching Approach towards Assessing Resilience of Romanian Collective Investment Undertakings

This paper explores the sensitivity of Romanian collective investment undertakings’ returns to changes in equity, fixed income and foreign exchange market returns. We use a sample of 80 open-end investment funds and pension funds with daily returns between 2016 and 2018. Our methodology consists of measuring changes in the daily conditional volatility for the fund returns (EGARCH) and changes in their conditional correlation with selected market risk factors (DCC MV-GARCH) throughout different volatility regimes identified using a Markov Regime Switching model. We argue that, on average, the level of conditional correlations between funds and market risk factors remained stable and unconcerned by the volatility regimes. In addition, for only less than half of the funds in the sample, their volatility regimes were synchronized with those of the selected market risk factors. We found that, on average, fund returns are more correlated with equity returns and less correlated with changes in local bond yields, while not being significantly influenced by changes in foreign bond yields or changes in foreign exchange. During the period investigated equity returns were the most volatile while the funds returns volatility were, on average, much more reduced. Overall, our results show the resilience of the Romanian collective investment sector to the selected market risk factors, during the investigated period.

Informed Corporate Credit Market before Monetary Policy Surprises: Explaining Pre-FOMC Stock Market Movements

We show that U.S. corporate bond market movements during the days preceding FOMC announcements can predict monetary policy surprises, as well as the pre-FOMC stock market movements. Starting several days before an expansionary (contractionary) surprise in FOMC decisions, corporate bond prices surge (decline) and yield spreads decline (surge). The pattern is statistically and economically significant. Moreover, corporate bond customers buy (sell) more often from dealers before expansionary (contractionary) surprises, suggesting that in aggregate they have more accurate information about the outcome of FOMC announcements. A portfolio that mimics customer trades is profitable with a Sharpe ratio of 0.64 and is profitable before both contractionary and expansionary surprises. Furthermore, consistent with the informativeness of corporate bond transactions, we show that lagged corporate bond customer-dealer trade imbalances can predict pre-FOMC stock market movements and explain pre-FOMC drift. Corporate bond yield changes “Granger-cause” stock pre-FOMC movements, and a 1% surge in the constructed TRACE bond yield during a 2 p.m.-to-2 p.m. period ending one day before an FOMC announcement, predicts a 5.8% decline in the S&P 500 index for the 2 p.m.-to-2 p.m. period ending on the FOMC meeting day. This bond-to-stock granger causality does not exist for non-pre-FOMC periods and is stronger for the companies with higher probability of default.

International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing

This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose longer-term bond yields into expected short-term interest rates and term premiums. We then examine the relative effects of changes in these two components of yields on changes in exchange rates and foreign bond yields. We find that the dollar is more sensitive to expected short-term interest rates than to term premia; moreover, the rise in the sensitivity of the dollar to monetary policy announcements since the GFC owes more to an increased sensitivity of the dollar to expected interest rates than to term premiums. We also find that changes in short rates and term premiums have similar effects on foreign yields. All told, our findings contradict the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies.

Climate Change, Financial Stability and Monetary Policy

Using a stock-flow-fund ecological macroeconomic model, we analyse (i) the effects of climate change on financial stability and (ii) the financial and global warming implications of a green quantitative easing (QE) programme. Emphasis is placed on the impact of climate change damages on the price of financial assets and the financial position of firms and banks. The model is estimated and calibrated using global data and simulations are conducted for the period 2016–2120. Four key results arise. First, by destroying the capital of firms and reducing their profitability, climate change is likely to gradually deteriorate the liquidity of firms, leading to a higher rate of default that could harm both the financial and the non-financial corporate sector. Second, climate change damages can lead to a portfolio reallocation that can cause a gradual decline in the price of corporate bonds. Third, climate-induced financial instability might adversely affect credit expansion, exacerbating the negative impact of climate change on economic activity. Fourth, the implementation of a green corporate QE programme can reduce climate-induced financial instability and restrict global warming. The effectiveness of this programme depends positively on the responsiveness of green investment to changes in bond yields.