Bond Yields Research Articles

Roles of the Government Bond Yield and the Exchange Rate in the Monetary Conditions of Türkiye

Roles of the Government Bond Yield and the Exchange Rate in the Monetary Conditions of Türkiye

Effect of Inflation Rate on government bond yields listed at the Nairobi Securities Exchange.

This study aimed to determine the effect of inflation rates on government bond yields listed on the Nairobi Securities Exchange (NSE). The primary objective was to assess how fluctuations in inflation impact the yields of 15-year government bonds over a 16-year period, from the first quarter of 2007 to the first quarter of 2023. The study applied liquidity premium theory, as posited by Brennan (1979), which suggests that investors require a liquidity premium, or higher yield, during inflationary periods to compensate for the erosion of purchasing power in fixed-income investments. Given this theoretical framework, the research sought to quantify the relationship between inflation rates and bond yields, considering how rising inflation prompts higher yields to maintain purchasing power.The study employed a causal-comparative research design, utilizing secondary data on bond yields and inflation rates sourced from NSE and Central Bank of Kenya records. Key diagnostic tests, such as the Jarque-Bera test for normality, Breusch-Pagan-Godfrey test for heteroscedasticity, and Augmented Dickey-Fuller test for stationarity, ensured data validity and reliability. The Vector Error Correction Model (VECM) was used to analyze both short- and long-term relationships between inflation and bond yields. Findings revealed a statistically significant positive correlation between inflation rates and government bond yields, with inflation accounting for 45% of the variance in bond yields. The standardized coefficient of 0.67 suggested a moderate-to-strong association, highlighting inflation’s critical role in bond pricing. Based on these results, it is recommended that investors and policymakers closely monitor inflation trends as they influence bond yields and market performance. Further research could explore other macroeconomic factors, such as interest rates, to offer a more comprehensive view of bond market dynamics in emerging economies.

The perverse valuation effect on mergers and acquisitions in Europe

We investigate the macroeconomic and financial determinants of mergers and acquisitions (M&As) in Europe and address the gap in understanding how financial market dynamics influence corporate decisions. While previous literature has examined macroeconomic factors affecting M&As, the impact of (10-year government) bond yields remains underexplored. We fill this gap using panel data of 21 European Union Countries over 2006:Q1–2022:Q2. Across different model specifications we find that bond yields and real gross domestic product growth are robust determinants of M&As, even after controlling for other determinants. A novelty of our study is that rising and higher bond yields are associated with a reduction in M&As activity because investors are shifting their portfolios out of bonds and into riskier assets like equities, thereby increasing acquisition costs. We denote this as a “perverse valuation effect”offering new insights into M&As dynamics.

Russia–Ukraine war and the cost of borrowing in the West African Economic and Monetary Union sovereign debt market

AbstractThis paper contributes to the emerging literature on the economic impacts of the Russia–Ukraine war by estimating the effects of that war on FCFA‐denominated sovereign bond yields and spreads for the West African Economic and Monetary Union (WAEMU) countries. Using ordinary least squares regressions on monthly panel data from January 2020 to December 2022, we found three key results. First, the Russia–Ukraine war significantly increased long‐term government bonds but had no impact on short‐term sovereign bond yields. Second, the Russia–Ukraine war raised sovereign bond spreads in WAEMU countries. These results suggest that WAEMU countries may consider reducing sovereign long‐term bond issuances and exploiting alternative financing sources, such as concessional financing, until the war and its corollary of global economic and financial imbalances are resolved. Finally, we found that the Central Bank of West African States's policy rate hikes increase governments' borrowing costs. Given this impact, we recommend complementing monetary policy with nonmonetary and fiscal policy measures to ease inflationary pressure from the Russia–Ukraine war. This approach may help mitigate the upward pressure driven by monetary policy tightening on sovereign borrowing costs in the WAEMU government securities markets.

Analysis of factors influencing banks' profitability using panel data models

The banking sector, as one of the fundamental pillars of the financial industry, being in a healthy condition is of paramount importance not only from an individual perspective but also for firms and governmental administrations. Banks support sustainable economic conditions in all economies by facilitating investments and channeling idle funds into the economy. In this study, the analysis of micro and macro-level variables affecting the return on assets and return on equity of 24 banks operating in the Turkish banking sector from 2016 to 2023 has been investigated using panel data models. According to the results obtained from the analysis, it was found that there is a positive and significant relationship between return on assets and capital adequacy ratio, a negative and significant relationship with non-performing loans, a positive and significant relationship with BIST100 (Borsa Istanbul 100 Index), and a negative and significant relationship with bond yields. Additionally, a negative and significant relationship was found between return on equity and non-performing loans, and a positive and significant relationship with the BIST100 index.

Bond supply expectations and the term structure of interest rates

This paper investigates the influence of forward-looking government bond supply information on changes in the term structure of interest rates. While traditional arbitrage-free models suggest that bond supply should not impact bond yields, models accounting for preferred-habitat investors and imperfect asset substitutability raise this possibility. By analysing debt supply expectations derived from Germany's Treasury press releases, we find that news about expected bond supply affects bond yields, supporting the notion that supply expectations influence current interest rates. Our study also extends macro-finance models, highlighting the significant role of supply expectations in term structure dynamics. Additionally, we provide insights into the puzzle of German government bond yields falling below the ECB deposit rate.

Investors reward countries for participating in climate agreements

International climate agreements are one of the best-known approaches to coordinating climate actions among governments but face a free-rider problem, where individual governments lack sufficient incentives to reduce emissions. This study examines the role of investors in providing rewards to governments through sovereign bond yields to encourage climate cooperation and reduce emission intensity. Using a difference-in-differences method, this study examines how sovereign bond yields change around the Kyoto Protocol and the Paris Agreement. The findings show that investors reward governments committed to reducing greenhouse gas emissions with a 4 to 5 basis point decrease in sovereign bond yields. This suggests that investors better compensate countries making significant commitments to climate agreements, helping mitigate the free-rider problem and encouraging effective climate action.

Assessing State Resilience: Lynching and Its Ramifications on State Credit in the United States

ABSTRACTThe importance of state capacity and institutional quality has received significant attention within the academic literature. This is especially true as it relates to the protection of property rights and, ultimately, the role it plays in economic development. This study adds to this literature by considering how lynching activity across US states impacts sovereign credit. Given that lynching tends to be associated with weak public‐sector institutions, limited‐access social orders, and the weak protection of individual and property rights, we posit that as lynchings increase so too will bond yields. The analysis covers the period 1883–1920 and find support that state borrowing costs rose as lynching activity increased. The results are robust to a number of specifications, demographic groups, and regions. Implications are discussed.

Liquidity Preference, Interest Rate Spread, and the Transformation of the US Financial System

This article examines empirical patterns of interest rate spreads between yields on long-term corporate bonds and the Federal Funds Rate (FFR) in the United States over the period from 1960 through 2023. Since the early 1980s, discernible patterns of interest spreads have emerged, revealing marked deviations in corporate bond yields from the FFR. We focus on financial market forces particularly arising from financial intermediaries in analyzing these patterns. To this end, the article develops a theoretical framework based on the concept of liquidity preference in Keynes’s 1937 papers and the works of Hyman Minsky and Victoria Chick. We also conduct cointegration analyses for corporate bond yields, the FFR, and financial intermediaries’ leverage ratios. Overall, our empirical results indicate that the relationship between the FFR and corporate bond yields—particularly with respect to their long-run relationship and interest rate markups—has markedly changed since the 1980s and is significantly affected by financial intermediaries’ asset/capital leverage ratios. As a policy implication, regulatory reforms aimed at enhancing the Federal Reserve Bank’s capacity to steer long-term rates and contain intermediaries’ balance sheet leverage, particularly those centered on risky asset trading to increase gains from price differentials, are required JEL Classification: B26, E11, E43, E52

Факторы доходности облигаций дополнительного первого уровня (АТ1)

Additional Tier 1 bonds (AT1 bonds) are hybrid financial instruments issued by banks under Basel III. In case of a threat to the financial stability of an institution, these bonds can be converted into equity or written down to help the bank meet capital requirements. AT1 bonds are designed to insure a bank against a potential capital shortfall and minimize the need for a regulatory bail-out. AT1 bonds gained new attention after the collapse of Credit Suisse (CS), when all outstanding AT1 bonds issued by the bank were written down to zero. This paper provides an overview of AT1 capital, compares the main types of AT1 bonds and describes their most common features. In addition, it quantifies the risk premium in AT1 bond yields and identifies the main factors underlying this premium. The analysis is supported by real data on AT1 issuance in Europe. It is shown that in the primary market investors demand a significant premium from banks for the additional risk embedded in AT1 bonds. The size of the premium depends mostly on issuer-specific factors such as issuer’s credit risk, capital ratio, stock volatility and asset size. On the contrary, security design turns out to be a less important pricing factor. The author compares the results before and after the CS crash and concludes that the CS AT1 write-down did not directly affect the pricing principles in the market. The results of the research may be useful both for investors looking for yield pickup in financial sector and for banks working on the optimal design for their AT1 bonds.

Should underwriters be trusted? Reducing agency costs through primary market supervision

We examine the mandated introduction of a supervised auction framework within China's primary bond market. This regulatory intervention resulted in a substantial reduction in debt costs for Chinese Bond issuers, primarily attributed to the alleviation of agency conflicts between underwriters and issuers. Leveraging unique bidder-level data obtained from a lead underwriter, our study provides replicable tools to discern collusive bidding behavior. This sheds light on instances of artificially inflated bond yields, highlighting economically burdensome practices. Our findings can assist regulators, issuers, and investors engaged in unsupervised auction mechanisms. Our insights offer potential enhancements to regulatory frameworks and operational efficiency across various sectors, including securities issuance, construction projects, and procurement.

What drives liquidity in the Chinese credit bond markets?

We study the drivers and pricing of liquidity in the Chinese credit bond markets. We document that the liquidity and liquidity effects priced into yield spreads differ significantly across the four major credit bond categories and the two parallel trading venues: the interbank over-the-counter and exchange markets. We analyze the levels of liquidity and the pricing of liquidity effects into credit bond yield spreads using three counterfactuals: a collateral shock to repo eligibility, a crackdown on agent-holding activities, and four liberalization shocks on foreign investment. We identify the bond risk and macroeconomic channels as significant influences on liquidity effects but not the information channel. Our empirical findings are robust to a battery of tests.

Determinants of Indonesian Government Bond Yield

Determinants of Indonesian Government Bond Yield

Time Series Analysis of the Connection between Exchange Rate of EUR/USD, Bond Yields, and Trade Growth

In the context of the growing importance of global trade, the US dollar plays a crucial role as the currency for international transactions. The exchange rate of the dollar and the monetary policies of other countries influence each other. This study delves into the connection among the exchange rate of Euro/United States dollar (EUR/USD), the 10-year government bond rates with the international trade growth rates of 20 European countries from January 1991 to December 2016. By employing descriptive statistics, correlation analysis, regression modeling, and time series analysis, this research aims to uncover the underlying dependencies and predictive insights among these financial variables. The results indicate that the EUR/USD exchange rate has an insignificant impact on bond yields (R = 0.003), suggesting that other factors such as monetary policy, inflation expectations, and market liquidity play more significant roles. However, a weaker currency is linked to lower growth rates is shown by a strong negative correlation for the exchange rate and trade growth rates (R = 0.210). The multivariate regression model shows that bond yields and trade growth rates together explain 44.5% of the exchange rate variations, highlighting the interconnections among these economic variables. These findings highlight the necessity for policymakers to take these interconnected factors into account when developing economic and monetary policies to ensure stable and sustainable economic growth.

Determinants of the Developed Country Index and Indonesian Macroeconomic on the IDX Growth 30 and IDX Value 30

This study analyzes the determinants of the Developed Country Index (Hang Seng Index, Dow Jones Index) and Indonesian macroeconomic variables (10-Year Government Bond Yield, Foreign Ownership in Government Bonds, and the BI-7 Day Reverse Repo Rate, BI7DRR) on the movement of the IDX Growth 30 Index (IDXG30) and IDX Value 30 Index (IDXV30) from 2018–2022. Monthly time series data is used with a saturated sampling technique, processed via Eviews 12 using VECM analysis. The study conducts Stationarity, Optimal Lag, VAR Stability, and Cointegration Tests, along with Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) analyses Results show that the Hang Seng Index and Foreign Ownership in Government Bonds negatively affect IDXG30 and IDXV30, while BI7DRR positively influences both. The Dow Jones Index positively affects IDXG30 but negatively impacts IDXV30. Meanwhile, the 10-Year Government Bond Yield negatively affects IDXG30 and positively influences IDXV30. Additionally, the performance of IDXG30 and IDXV30 themselves and BI7DRR significantly contribute to both indices' movements.

Navigating Complex Process and Design Challenges in Hybrid Bonding for Advanced Semiconductor Integration: A Comprehensive Analysis

Abstract In advanced electronic systems, achieving top-tier interconnect interfaces with fine-pitch integration is of paramount importance. Among interconnect options, hybrid bonding is the preeminent choice given its exceptional capacity for accommodating a high input/output (I/O) count, which facilitates high-density memory integration, increased power delivery, and enhanced signal speed. One key technique for ensuring utmost quality in hybrid bonding involves embedding Cu interconnects within the dielectric layer. Equally pivotal is surface planarization, accomplished through chemical mechanical polishing (CMP), which encompasses a meticulous two-step procedure, commencing with copper bulk CMP and culminating in barrier CMP. The latter step is particularly critical, yielding the indispensable surface finish required for a successful hybrid bonding process. Several crucial surface properties significantly influence overall bond yield, including a copper recess (“dishing”) in the vias, erosion and roughness of the dielectric layer, and surface topography changes from high-density to low-density copper vias. To optimize these parameters, a comprehensive understanding of the interconnect layer's design is essential. Here, we delve into the ramifications of via scaling, ranging from 5 to 1 µm, on dishing and roll-off, and the effects of copper via density variation, spanning from 16% to 13%, on topography. Furthermore, we explore how incorporation of dummy vias impacts the final surface finish, potentially leading to improved bond yie

A novel approach to Predict WTI crude spot oil price: LSTM-based feature extraction with Xgboost Regressor

This paper presents a novel model based on LSTM to predict future prices of WTI crude oil. The WTI price forecasting utilizes data on spot gold price, US 10-year bond yield, global economic activity, and US dollar index from January 1986 to May 2023. The model's performance is assessed using measures such as MAE, MSE, RMSE, MAPE, and R2 metrics. The results generated by the proposed new model are compared to those of the existing machine and deep learning methods, and it is observed that the new model performs better than the existing models in all statistical tests. The study further examined the decision-making processes of the model using SHAP analysis and assessed the individual contribution of each feature to the model's predictions. The correlation between the US Dollar Index and Gold prices and WTI crude oil prices is evident. The SHAP research has demonstrated that the model effectively captures complicated economic linkages and enhances the accuracy of forecasts. The results of this study enhance the development of models that are capable of predicting results, even in times of significant instability, such as economic crises. Using sophisticated data analytics and AI methods would improve the efficiency of energy market oversight.

Government decisions and macroeconomic stability: Fiscal policies and financial market fluctuations

Since the 2008 Financial crisis, macroeconomic and financial markets' stabilisation policies relied mainly on monetary actions, reducing the ECB's margin of manoeuvre and calling for a major role for fiscal authorities. We investigate the impact of government decisions on financial markets for 11 Eurozone economies (from 1995 to 2021), in the very short run, using an event study, finding a positive (negative) reaction to fiscal expansion (consolidation) announcements and in the short/medium-run, with a Bayesian TVP-FAVAR, identifying cross-country heterogeneities; stronger (weaker) public finances show a direct (indirect) relation between fiscal policies and stock prices and an indirect (direct) one with 10-year bond yield.

Political polarization and state government bonds

This study examines the effect of political polarization in state legislatures on state bond yields in the United States. Political polarization, defined as the ideological divide between Democratic and Republican members of the state legislative chambers, reflects legislators' willingness to seek bipartisan compromises. We expect high polarization states to be riskier because they are likelier to experience gridlock, negatively affecting economic development and debt service commitment. Findings suggest a significant positive relation between bond yields and political polarization. A one-standard-deviation increase in polarization increases bond yields by 7.81 basis points and total interest expense by $2.3 million for an average bond issue. Additionally, this study finds that the effect of polarization on bond yields is stronger for general obligation bonds.

Integration of Sustainable Investments in the Management of Foreign Reserves Held by Central Banks

Motivated by both risk considerations, such as the impact of climate changes on asset prices, and the desire to support sustainable investments that contribute to global environmental goals, central banks are stepping towards the integration of sustainable investments in their Foreign Reserves management activity. This can be performed explicitly or implicitly, via a series of channels, such as the investment in labelled bonds, or the intertion of ESG metrics at portofolio level (e.g. portfolio carbon footprint). In the case of central banks, in general, the goal of sustainability can be integrated into the activity of managing reserves, without jeopardizing security and efficiency. The security and yield of green bonds support their incorporation into reserve portfolios, but some constraints could emerge in terms of accessibility and liquidity. Given the oversupply of green bonds in primary markets but reduced trading in secondary markets, the liquidity of green bonds may be limited, especially if investors keep these bonds to maturity. However, the persistence of excess demand should facilitate the sale of such assets, if necessary.