Domestic Bond Research Articles

Maturity diversification: The use of foreign and domestic bonds

Raising capital to support the execution of an organization's strategy is one of the most important responsibilities of financial managers. In our analysis we examine the characteristics of issued debt, specifically the maturity and market of issuance. Our empirical analysis finds that firms issue bonds to diversify their bond maturity profile using both foreign and domestic markets. Although firms primarily raise debt using their domestic markets, they use both foreign and domestic markets especially at the short and long maturities. Beyond diversifying their maturity portfolio, borrowing decisions are influenced by factors such as asset maturity, credit worthiness, and transparency.

Exploring the dynamic connections between oil price shocks and bond yields in developed nations: A TVP-SVAR-SV approach

This paper investigates the impact of oil price changes on bond yields across nine developed nations, focusing on how demand, supply, and oil-specific demand shocks influence bond spreads. Using a Time-Varying Parameter Structural Vector Autoregression with Stochastic Volatility (TVP-SVAR-SV) model, we find that bond yields are short-term responsive to oil price fluctuations, indicating efficient domestic bond markets. However, we observe distinct country-specific reactions, particularly in the US and the UK. In the US, supply shocks cause temporary declines in bond yields, while demand shocks reduce bond yields in both countries. Oil-specific demand shocks have cyclical impacts. Unlike the global financial crisis, the COVID-19 pandemic uniquely influenced bond yields, with minimal short-term effects in Canada, France, Spain, and the US post-COVID-19, contrasting with the severe impacts during the financial crisis. These findings suggest investors should consider the varying impact of oil shocks on bond yields across countries, and policymakers should monitor and address the potential implications of oil price fluctuations for financial stability and market efficiency.

A MODEL OF GROSS CAPITAL FLOWS: RISK SHARING AND FINANCIAL FRICTIONS

AbstractThis article builds a two‐country model of gross capital flows where agents share tradable output risk using two bonds, subject to stochastic collateral constraints. Equilibrium portfolios are short in domestic bonds and long in foreign bonds because the endogenous movements of the real exchange rate provide a hedge against domestic output shocks. Under negative domestic shocks, these external positions transfer wealth from home to abroad. During the Great Recession, the model shows that such wealth transfer from the United States mitigated the consumption drop abroad. Quantitatively, financial frictions account for about half of the collapse in U.S. gross flows in 2008.

Currency Flowback and Opening Up Bond Markets

The internationalization of the Renminbi (RMB) has become a practical reality in global financial markets and economic dynamics. Understanding the mechanism of currency flowback, the movement of the RMB back to China’s domestic financial system after being utilized abroad, is crucial in comprehending the evolving landscape of global finance and China’s position within it. This article investigates the relationship between currency flowback and RMB internationalization through theoretical frameworks, empirical evidence, and model simulations. The opening of bond markets plays a pivotal role in facilitating currency flowback and promoting RMB internationalization by attracting foreign investors and increasing the liquidity of domestic bond markets. A Dynamic Stochastic General Equilibrium (DSGE) model incorporating bond market opening-up illustrates the potential for improved financial stability and economic resilience. However, the conclusions drawn from simulations are contingent on maintaining a moderate foreign holding ratio of domestic bonds to mitigate risks associated with excessive foreign ownership.

UIP deviations: Insights from event studies

We evaluate the behavior of the UIP relationship around monetary policy and global uncertainty shocks using event studies. We find that the covariance between exchange rate movements and changes in long-term yield differentials is conditional on the nature of shocks. A model of partial arbitrage between domestic and US bond markets predicts that tighter US monetary policy appreciates the dollar while increasing US yields relative to domestic bonds, a response that is consistent with UIP forces, while global uncertainty shocks appreciate the dollar while raising domestic yields relative to US bonds, exacerbating the widely documented UIP violation. The empirical analysis supports these mechanisms, specially for developed economies. For emerging economies, both relationships are weaker, consistent with more pervasive currency stabilization policies that mute the FX response at the expense of higher volatility in longer yields. Our results suggest a more nuanced interpretation of the unconditional failure of the UIP.

Accuracy of analytical approximation formula for bond prices in a three-factor convergence model of interest rates

We consider a convergence model of interest rates, in which the behaviour of the domestic instantaneous interest rate (so called short rate) depends on the short rate in a monetary union that the country is going to join. The short rate in the monetary union is modelled by a two-factor model, which leads to a three-factor model for the domestic rate. In this setting, term structures of interest rates are computed from bond prices, which are obtained as solutions to a parabolic partial differential equation. A closed-form solution is known only in special cases. An analytical approximation formula for the domestic bond prices has been proposed, with the error estimate only for certain parameter values, when the solution has a separable form. In this paper, we derive the order of accuracy in the general case. We also study a special case, which makes it possible to model the phenomenon of negative interest rates that were observed in the previous years. It turns out that it leads to a higher accuracy than the one achieved in the general case without restriction on parameters.

Exploring the performance of US international bond mutual funds

AbstractWe use a Bayesian regime switching approach to examine the performance enhancement of adding US international bond funds to a domestic bond universe pre and post the Global Financial Crisis (GFC) during January 1999 and May 2022. We find that the international bond funds provide large significant performance enhancement pre the GFC, with an increase in Certainty Equivalent Return (CER) performance of 0.595% (monthly), but none post the GFC. The performance enhancement pre GFC is driven by Large Emerging Market bond funds, which is likely fueled by a substantial drop in the Emerging Market central bank policy rates pre GFC.

“Beauty and the Beast”: Romance, Reform, and Mystery in the Films of Lon Chaney

“Beauty and the Beast”: Romance, Reform, and Mystery in the Films of Lon Chaney

Evaluation of The Determinants of Domestic Bonds in Ghana

The study sought to examine the determinants domestic bonds in Ghana using secondary data. The researcher used the Government of Ghana bonds issued in 2013 to 2017 and has not matured by 31st December 2019. A sample of 6 Government of Ghana bonds which have been on the secondary market for at least two years with a tenor of at least three years was used by the researcher. Based on the stationary and the existence on cointegration vectors, the study investigated long and short run effects using ARDL (1,0,1,1,1,1) and ARDL (1,2,2,2,2,2) Error Correction Models respectively. The E-Views version 11 was used to conduct the analysis. It was found that GDP had a long run insignificant positive effect on Ghana Government Bond Prices, but a short run significant positive effect on Ghana Government Bond Prices. The second major finding was that Exchange Rate had a significant positive effect on Ghana Government Bond Prices in the long run, but this significant effect was negative in the short run. Thirdly, it was revealed that inflation had a significant negative effect on Ghana Government Bond Prices both in the long and short run. Risk Free Rate of Return had a significant negative effect in the long run but had insignificant effect in the short run. Monetary Policy Rate had significant positive effects in the long and short run. It was concluded that increases in Exchange Rate, Gross Domestic Products and monetary policy led to corresponding increases in the prices of government bonds while increases in Inflation, and Risk Free Rate of Return led to a decrease in the prices of Government bonds. In the short run, an increase in Exchange Rate and Inflation leads to a decrease in bond prices while an increase GDP, Risk Free Rate of Return and Monetary Policy Rate leads to a corresponding increase in bond prices. It is recommended that investors consider inflation, GDP, exchange rate, Risk Free Return and Monetary Policy, among other factors, when making decisions on the position to take in a bond as it determines bond prices. Policymakers should aim at working to achieving low inflation and exchange rate figures as that will increase bond prices and make it more attractive to foreign investors. It is also important that policy makers understand and manage effectively risk free bonds and the monetary policy as they have significant effects on the prices of government bonds.

Measuring the effects of large-scale asset purchases: The role of international financial markets and the financial accelerator

We build and estimate a two-country structural macroeconomic model with meaningful household portfolio decisions over foreign and domestic bond holdings and financial intermediation to investigate the efficacy of large-scale asset purchases (LSAP) by a central bank. Financial intermediation between financial assets and the real economy means that asset purchases do not directly lead to increased real investment. Instead, asset purchases result in an accumulation of deposits at banks without a corresponding rise in loans to the real economy. In contrast to conventional monetary policy (CMP), positive effects of asset purchases primarily work through consumption and exports via changes in real exchange rates. We find that this is in accordance with local projection analysis performed using identified LSAP and CMP shocks. Further, historical decomposition of US data reveals that unconventional monetary policies supported real economic activity when interest rates where zero (2009–2015), but not after. However, their effect on financial markets remained significant through 2019.

Botswana: African Domestic Bond Fund

Botswana: African Domestic Bond Fund

Opening-up Domestic Bond Market in the Support of China’s Supply-Side Reform

Opening-up Domestic Bond Market in the Support of China’s Supply-Side Reform

Cash Transfers, International Finance and Neoliberal Debt Relations: The Case of Post‐apartheid South Africa

ABSTRACTThis article situates South Africa's cash transfer programme within the country's financialized neoliberal regime. The adoption of economic liberalization by the African National Congress in the aftermath of the democratic transition has raised the profile of international investors in the domestic bond market. It is argued that this development, in the context of rising public debt and stagnating economic growth, has facilitated the financialization of the post‐apartheid state and has linked the sustainability of fiscal policy, and hence state‐led redistributive measures, to deepening debt relations with global asset managers. Additionally, a cluster of orthodox economic measures, such as inflation targeting and reserve accumulation, have served to thwart the potential for industrial upgrading. Moreover, it is posited that financial liberalization has further strengthened the influence of the Treasury over heterodox bureaucratic centres such as the Department of Trade and Industry, thereby serving to lock in the post‐transition neoliberal programme. Finally, the article argues that the integration of cash transfer recipients into the circuits of debt and finance is an outgrowth of the limitations of the social welfare programme and the broader financialization of the state. Overall, the analysis offered here serves as a counter‐argument to the notion that South Africa's cash transfer programme could offer a progressive alternative to market orthodoxy.

ВПЛИВ БОРГОВОЇ ПОЛІТИКИ УРЯДУ НА РОЗВИТОК ЕКОНОМІКИ УКРАЇНИ

The influence of the government's debt policy on the development of Ukraine's economy is analyzed. It is determined that today almost all indicators of debt stability in Ukraine exceed the critical limit, beyond which the state loses the ability to solve debt problems on its own. Thus, during 2014–2021, the domestic public and state-guaranteed debt of Ukraine increased in hryvnia equivalent by 3.9 times and as of the end of 2021 amounted to UAH 1,111.6 billion. The increase in debt was primarily due to direct public debt, which increased 4.1 times during the analyzed period. It is concluded that the scale of government borrowing in Ukraine makes it a threat to the economy, because without a change in the current government debt policy, the risk of the government's inability to meet its obligations to repay and service the debt will increase. Emphasis is placed on rethinking the country's economic policy in the direction of limiting the country's debt dependence, improving the structure of balance of payments and foreign trade balances, a balanced approach to the liberalization of relations in the foreign economic sphere and attracting foreign investment. A detailed analysis of trends in the issuance of domestic and external government bonds, as well as attracting debt financing from international financial organizations. The study of trends, and most importantly the structure of domestic government bonds, suggests that their growth is due to the need to finance not only the state budget deficit, but also the shortcomings and miscalculations of monetary and debt policy, as well as protectionist interests of individual businesses. Emphasis is placed on the fact that a significant share of non-residents' funds in domestic government bonds increases the country's exchange rate and financial vulnerability and is a factor that allows non-residents to influence the foreign exchange market and, accordingly, the national currency and international reserves of Ukraine.

ВИКОРИСТАННЯ РИНКОВИХ ДЖЕРЕЛ ФІНАНСУВАННЯ ДЕФІЦИТУ ДЕРЖАВНОГО БЮДЖЕТУ В УКРАЇНІ

Adopting a budget with a deficit in the modern world is not considered a negative phenomenon. However, it is imperative to identify sources of funding for such a deficit. In this regard, the use of market sources of financing the state budget deficit is the most optimal. The purpose of the article is to reveal the theoretical provisions and practice of financing the state budget deficit of Ukraine with the help of market sources. The article solves the following tasks: determining the place of financing the budget deficit in the process of equalization using different sources; characterization of existing sources of financing the budget deficit, and establishing criteria for classifying them as "market"; analysis of statistics on the preconditions for the state budget deficit in Ukraine; assessment of the use of market sources of financing the state budget deficit of Ukraine and the consequences of such financing. The existing sources of financing the state budget deficit are considered, among which: deficit financing emission, tax sources, budget sequestration, sale of budget assets, internal state loans, external state loans, free assistance. Market features identify the sources related to the use of debt financing instruments of the budget deficit, namely internal and external government loans. The advantages of using market sources of financing the state budget deficit are determined, namely: non-inflationary nature, efficiency of coverage, possibility to choose the most optimal offers on the market, wide opportunities for diversification, large base of risk reduction mechanisms, high liquidity. An assessment of the market sources use in terms of the state budget deficit financing in Ukraine allowed us to establish that external financing, which carries the greatest burden on the budget, accounts for the majority. In the structure of external financing, the largest share belongs to loans received by Ukraine from international financial institutions. Sold foreign government bonds also account for a large share of external debt. The domestic market for deficit financing is realized through the sale of domestic bonds. The increase in domestic and external debts poses a threat to Ukraine's debt security, which was analyzed using a number of indicators.

Is Foreign Debt Management in Gabon Efficient?

Abstract The objective of this paper is to show whether external debt management in Gabon is effective. Our study period is from 1989 to 2019 and we use error correction modeling. The significance and positive sign of the recall force shows that short-term imbalances do not correct in the long run, implying that debt management is inefficient as exchange rate fluctuations create changes in the shares of debt denominated in U.S. dollars, Japanese yen, and special drawing rights in both the short and long run. It is difficult for the debt manager to balance his portfolio. The originality of the article is to show that the management of the debt, in particular the external debt, is difficult to be seen inefficient by taking the example of a small economy opened on the outside. It is then a question of rethinking public policies and especially of carrying out structural reforms in the economy in order to minimize the consequences of a high external debt. In this context, the literature recommends either dollarizing all of its debt or allowing the development of a domestic bond market to protect against (or at least minimize) the effects of exchange rate fluctuations on external debt. While we find the latter proposal relevant, we believe that the former is not. Furthermore, we would add that Gabon should implement reforms to boost its industrial sector in order to improve its integration into international trade. The goal is to counter (even partially) the effects of currency fluctuations through export gains.

Prospects and challenges of green bonds in renewable energy sector: case of selected Asian economies

ABSTRACT The rising demand for electricity and climate change issues associated with conventional sources has raised the need for renewable energy. With limited scope from traditional sources of finance, green bonds provide an alternative and innovative market for green financing. This study aims to critically analyse, for the first time, the status of the green bond market system in six economically diverse Asian countries and identify the current enablers and inhibitors for its growth. It is found that the lack of formal institutional set-up, domestic bond economy, developing stages of the capital bond market with limited private participation and lack of international certification impedes the development of green bond market. Deepening of capital markets like in the case of developed countries will help in tapping both domestic and international investors while simultaneously aligning with global commitment towards climate change issues.

On the legal regulation of debt obligations on domestic bond loans

On the legal regulation of debt obligations on domestic bond loans

Fundraising for Development of the Eastern Polygon

Recently, China has become a particularly important strategic partner for Russia. The transport corridor between Europe and Asia, passing through Siberia, can provide additional revenue for the carrier and modernize the railway infrastructure. Its condition will also affect the economic development of the Siberian region. The traditional sources of expanded reproduction financing are profits, additional investments of founders or raised funds. Due to the deficit of the federal budget, the possibilities for increasing investments in the capital of JSC “Russian Railways” (“RZD”) were limited. About two thirds of investment projects are financed by the raised funds. But under Western sanctions, the traditional sources of cheap resources attracted from European financial markets are closed. As a result, more and more long-term resources are attracted from Russian banks and at the expense of domestic bond loans. In this regard, the savings of the population become a particularly significant source of investment resources to be transformed into investments both through the banking system and the securities market using individual investment accounts.

Home bias and the need to build a bond market track record

ABSTRACT This paper examines home bias in the primary distribution process of the European corporate bond market. Our approach allows us to study the initial holdings of corporate bonds at a uniquely liquid point in their life cycle. We find that home bias is prevalent across our sample, but is highest amongst bonds issued by firms from both the highest-debt market size economies and lower-debt market sizes economies, who both benefit from relatively large domestic bond markets compared to their funding needs. We argue that international diversification can occur in this market through a life cycle effect where issuers outgrow investor home bias and build a reputation amongst international investors through regular bond market issuance. Our results provide some initial support for this life cycle effect, with repeat issues, issues off an EMTN programme, and highly subscribed issues being associated with lower home bias.