Government Bond Market Research Articles

ОВДП ЯК ІНСТРУМЕНТ ВПЛИВУ НА МОНЕТАРНЕ ТА ФІСКАЛЬНЕ РЕГУЛЮВАННЯ В УКРАЇНІ

The article is devoted to the study of the impact of domestic government loan bonds on the mechanisms of monetary and fiscal state regulation in Ukraine. The relevance of this study was to investigate how government bonds affect the instruments of fiscal and monetary policy, as well as to find out how promising the development of the government bond market in Ukraine is, especially in the current conditions of crisis and instability. The object of the study is the processes of influence of domestic government loan bonds on the mechanism of monetary regulation in Ukraine. The subject of the study is the theoretical and methodological provisions for determining the impact of domestic government loan bonds on monetary and fiscal policy in Ukraine. The current state of the DGLB market in Ukraine was investigated and the main factors affecting the formation of demand for these securities were determined. The dynamics of the weighted average yield of hryvnia government bonds over the past five years were also analyzed and the main factors affecting its dynamics were identified. Using Pearson correlation coefficient, the value was calculated and the correlation between the yield of government bonds and the value of the discount rate of the National Bank of Ukraine was determined, the value of the coefficient indicates the existence of a strong direct correlation between these indicators. The next step was to determine the role of the yield of DGLB in the mechanism of monetary regulation, and based on this a cycle was modelled which begins with a change in the discount rate, passes through a change in the demand for DGLB, and ends when the rate of inflation changes under the influence of previous factors. Thus, it was proven that with an unchanged supply of foreign currency, due to the increase in demand for hryvnia government bonds from non-residents, the rate of inflation slows down. Also, forecasting of the yield of government bonds was carried out using a one-factor regression equation, taking as a basis the data of the discount rate forecasted by the National Bank. The last element of the study was the determination of the correlation between the dynamics of DGLB yields and the hryvnia to US dollar exchange rate. Based on the analysis, the value of the Pearson correlation coefficient between these indicators was calculated for different values of time lags, and it was determined that the coefficient reaches its highest value with a time lag of 10 months.

Global Economic Policy Uncertainty and Government Bond Market Volatility

Global Economic Policy Uncertainty and Government Bond Market Volatility

Clients' Connections: Measuring the Role of Private Information in Decentralized Markets

ABSTRACTWe propose a new measure of private information in decentralized markets—connections—which exploits the time variation in the number of dealers with whom a client trades in a time period. Using trade‐level data for the U.K. government bond market, we show that clients perform better when having more connections as their trades predict future price movements. Time variation in market‐wide connections also helps explain yield dynamics. Given our novel measure, we present two applications suggesting that (i) dealers pass on information, acquired from their informed clients, to their affiliates, and (ii) informed clients better predict the orderflow intermediated by their dealers.

The Degree of Integration of the Bulgarian and Croatian Government Bond Markets into the Eurozone Government Bond Market

The Degree of Integration of the Bulgarian and Croatian Government Bond Markets into the Eurozone Government Bond Market

Financial uncertainty and interest rate movements: is Asian bond market volatility different?

The COVID-19 pandemic has given rise to a spike in financial market volatility. In this paper, we attempt to assess the effects of financial & news-driven uncertainty shocks in growing Asian economies, using country-specific bond volatility shocks as a measure of local interest rate uncertainty. Also, we contrast the effects of local uncertainty with global stock market uncertainty. Using bond market data from nine Asian markets, we uncover a transmission mechanism of uncertainty shocks via the bond market. The mechanism works as a crowding-out effect due to government-led excessive market borrowing with supply-side consequences for the private sector, as opposed to economic policy or global stock market uncertainty which works more like a demand shock as in the literature. We conclude that countries with growing fiscal deficits that entail a larger government bond market or higher current account deficits, tend to experience an increase in the cost of borrowing due to this bond market volatility or interest rate uncertainty shocks.

Directions of government debt securities market development

The securities market is a powerful platform to accumulate capitals for further investment in favor of structural reconstruction of economy, increasing population welfare level at the cost of fund financial instrument holding. As one of financial instruments the government debt securities gained widespread use as reliable, easy-to-use and readily obtainable financial assets. The place of bonds of domestic government loan in the formation of Ukraine’s public debt and financing of the state budget deficit is highlighted in the article. The modern statistics confirms the safety and viability for the use of internal government debt securities, and the author in made research proves significant increase of amounts attracted to budget financial fund from Ukrainian domestic government bonds settlement. The article systemizes the data on main indicators of the domestic market of Ukrainian domestic government bonds, determines the portfolio structure on the basis of ownership and describes ways to expand range of potential investors, for example, by involving physical entities. Several banks – primary dealers were chosen to analyze the purchase terms of Ukrainian domestic government bonds for citizens of Ukraine on the primary market. The directions of developments of domestic internal bet market was determined, and they are to strengthen communication with fund market participants, to concentrate liquidity in certain instruments, to protect investors multilateral trading systems, to make pricing transparent on the Ukrainian domestic government bonds market, to arrange auctions regularly, diversification of foreign currency debt structure portfolio etc. The well-structured process of Ukrainian domestic government bonds emission in the part of public debts management strategy will allow to hold investors with such investment time frame interested to obtain instruments in the mid-run.

Price Discovery Pada Pasar Obligasi Pemerintah Indonesia

The study investigate price discovery in Indonesia government bond market. Understanding price discovery is a must to identify relevant factor affecting price of the asset. This research will cover two tier market, first tier is interdealer market and second tier is customer market. We study the dealer and customer order flow to identify which side that have greater impact in price formation in government bond market. The results show that from the two layers of order flow, the short-term dealer order flow and short-term customer order flow have role in price discovery process. Customer flow order regression coefficient is larger than the dealer order flow. Customers trade not only trade based on liquidity but also have information in making decisions or making investment portfolios (informed customers). At the group dealer order flow, dealers have a heterogeneous role and have different segments.

Government Bonds and Stock Market : Volatility Spillover Effect

A new data set of government bond prices, that is, the Clearing Corporation of India Limited’s Broad Total Return Index (BTRI) was introduced in this paper. The Total Returns Index (TRI) provides the change due to both the price movements and accrued interest. TRI reflects the change in the index due to market capitalized weighted price movement and accrued interest. This paper investigated volatility spillovers between government bonds and the stock market in India by following the GARCH (1, 1). By using a broad weekly data set during 2004 – 2019, with a total of 835 observations, this paper addressed a key research question : Does the effect of volatility spillover exist between government bonds and Nifty ? Does causality exist between government bonds and Nifty ? The results of Granger causality indicated that BTRI did not Granger cause Nifty. Further, the reverse was also not true, meaning that there existed no lead-lag relationship between BTRI and Nifty. The squared residuals’ coefficient of Nifty had a positive sign but was insignificant, showing that there was no effect of volatility spillover from the Nifty to the BTRI. Hence, the volatility in Nifty did not influence volatility in the BTRI but vice versa, this statement is also not true. This research is mainly useful to those investors who invest in both government bond market and stock market.

The Effect of Cartels on Government Bond Revenue

In 1989, the Japanese government introduced auctions for the sale of 10-year government bonds, replacing the legal cartel syndicates that had previously coordinated prices. Using this policy change as a natural experiment, this paper uses a difference-in-differences (DID) methodology to assess the effect of cartels on government revenues in the primary market for government bonds, finding that cartel prices were lower than auction prices by 1.5 percent or more. These results imply that the prior use of legal cartels had reduced Japanese government revenues from bond sales by at least 0.025 percent of Japan’s GDP or USD 1.1 billion.

Funding liquidity and market liquidity in government bonds

Using a comprehensive dataset of orders and trades in the Indian government bond market, this study presents new evidence on the effect of funding liquidity on market liquidity. We find no evidence that lower short-term interest rates – the key instruments of monetary policy – boost market liquidity. However, consistent with models that stress the role of intermediary capital, we find that market liquidity measures have a strong, positive association with short-term borrowing by primary dealers. We provide additional evidence linking these firms’ borrowing to their balance sheet strength and secondary market participation. The results suggest that localized funding conditions specific to marginal suppliers of intermediation services are more important for market liquidity than the broader economy-wide funding environment.

Bond flows and liquidity: Do foreigners matter?

In their search for yield in the current low interest rate environment, many investors have turned to sovereign debt in emerging economies, which has raised concerns about risks to financial stability from these investment flows. To assess this risk, we study the effects of changes in the foreign-held share of Mexican sovereign bonds on their liquidity premiums. We find that a decade-long increase in foreign holdings of these securities have played a significant role in driving up their liquidity premiums. Provided the higher compensation for bearing liquidity risk is commensurate with the chance of a major foreign-led sell-off in the Mexican government bond market, this development may not pose a material risk to its financial stability.

Centralizing Over-the-Counter Markets?

In traditional over-the-counter (OTC) markets, investors trade bilaterally through intermediaries referred to as dealers. An important regulatory question is whether to centralize OTC markets by shifting trades onto centralized platforms. We address this question in the context of the liquid Canadian government bond market. We document that even in this market, dealers charge markups, and show that there is a price gap between large investors who have access to a centralized platform and small investors who do not. We specify a model to quantify how much of this price gap is due to platform access and assess welfare effects. The model predicts that not all investors would use the platform even if platform access were universal. Nevertheless, the price gap would close by 32%-47%. Welfare would increase by 9%-30% because more trades are conducted by dealers who have high values to trade, for instance, because they seek to sell inventory.

The Emerging Asia Pacific Capital Markets: Cambodia

The Cambodian capital markets have come a long way considering that the Paris Peace Agreements, which ended the nation’s civil war, were signed only in 1991. Strong GDP growth (10.8% annually between 2000 and 2018), a dollarized economy with free movement of capital, and a policy consensus favoring investments should have spurred the rapid development of a securities exchange in Cambodia. The first equity listing on the Cambodian Stock Exchange (CSX), however, did not take place until 2012. Currently in Cambodia, seven companies are listed on the main board, and another six companies have issued eight bonds. The CSX is still small in size compared with its Asian neighbors’ bourses. Its development is also behind schedule given the urgent need of local corporations to find cheap and convenient sources of funding. Stocks and bonds on the CSX have had comparatively low returns historically when compared with less risky bank deposits or higher returns from real estate. Mindful of these challenges, the Royal Government of Cambodia has implemented a broad range of measures to support faster capital market development. Educating both investors and corporations, introducing accounting standards and audit requirements, and licensing such market actors as fund management companies, securities brokers, and custodian banks, to name a few, will provide the infrastructure and support Cambodia needs for long-term growth. Listing private companies with exciting growth prospects will be key in renewing interest among potential investors in Cambodia. Likewise, new investment choices such as REITs, private equity, and mutual funds should spur further interest. The creation of a government bond market will be critical as well in order to attract institutions that crave safe and long-dated assets for asset–liability management purposes. All of these factors combine for a constructive view of the prospects for Cambodian capital markets.

The Emerging Asia Pacific Capital Markets: Bangladesh

The 39th largest economy in the world, Bangladesh has a GDP of more than US$300 billion. Its population of more than 160 million people occupies a relatively small area, only 144,000 square kilometers. Bangladesh experienced significant economic growth during the last two decades. Its financial markets have lagged, however, compared with this economic improvement. Equity market capitalization stood at only 14% of GDP in June 2019. Price performance has also been below par, with an average annual return of only 0.08% in the last decade. Bangladesh’s main sectors are telecommunications, financials, pharmaceuticals, consumer goods, and power and utility, and its top 20 companies make up 54% of the market capitalization. Although local investors dominate the market, foreign institutional investors have increased their participation over the years. They now contribute around 6%–8% to daily transactions. Compared with its stock market, Bangladesh’s fixed-income market is much smaller. The government bond market accounts for 7.9% of GDP, and the corporate bond market accounts for only 0.01% of GDP. The fixed-income market is denominated in the local currency, the taka (BDT), and the country has not yet explored the opportunity of issuing debt instruments in foreign currency. The largest investors in the Bangladeshi fixed-income market are commercial banks, followed by insurance companies. Even though the taka has been stable for several decades and there are no capital controls, the bond market's foreign investment is at a nascent stage. With new leadership at the Bangladesh Securities and Exchange Commission, much-needed reforms have begun to gain momentum. Both the equity and debt markets are poised for significant growth in coming years if corporate governance, market integrity, a quality IPO pipeline, technological improvements and listing of debt instruments, and simplified debt issuances can be ensured.

Integration and Disintegration of EMU Government Bond Markets

It is commonly found that the markets for long-term government bonds of Economic and Monetary Union (EMU) countries were integrated prior to the EMU debt crisis. Contrasting this, we show, based on the interrelation between market integration and fractional cointegration, that there were periods of integration and disintegration that coincide with bull and bear market periods in the stock market. An econometric argument about the spectral behavior of long-memory time series leads to the conclusion that there is a stronger differentiation between bonds with different default risks. This implied the possibility of macroeconomic and fiscal divergence between the EMU countries before the crisis periods.

The evolution of the Polish government bond market

The evolution of the Polish government bond market

Constructing the Yield Curve for Sri Lanka's Government Bond Market

The primary objective of the study was to construct the most applicable model that can be used for fitting yield curves for Sri Lanka Government Bonds. It is important to adhere to a scientific method of deciding the yields for respective securities in line with the yield curve than ad-hock and personal judgments for bond Investors, traders, and monetary authorities. Nelson-Siegel model used Ordinary Least Squares after fixing the Lambda parameters to make the model linear and flexible enough to handle. Primary examination of the Nelson-Siegel parsimonious approach on Sri Lanka Government Securities yields fit the yields having an average R2 of 91.4%. But R2 was not consistent throughout the entire study period i.e., 2010 to 2018 as R2 fell below 80% in some of the periods. Hence, the different discounting function was used to enhance the accuracy and predictability of the model applying Ordinary Least Squares technique. Two models were derived for the final test and evaluation and found one model with two exponential decay functions and tenor as another predictor. This model exhibits over 97% R2 even after fixed for two Lambdas. Further, the out-of-sample predictability of the model surpassed the other models with an average of higher R2 values and less Mean Residual Sum of Squared values. Clustering algorithms (listed under Weka) were used to examine the different patterns of the yield curve during the study period. The same model was re-constructed for identified clusters fixing separate Lambda but the comparison of separate lambda for each cluster and overall lambda did not indicate significant differences. The final model comprises the traditional Nelson-Siegel model, but more towards the Dobbie-Wilkie Model, which accounted for two exponential dece functions and a time variable. In Sri Lanka, very few attempts have been made to understand the behavior of the yield curve. That resulted to have controversial and unorthodox practices to judge the optimal yields for respective government bonds, especially for the longer tenor bonds beyond 5 years. Monetary authorities are geared to develop and extend the Sri Lankan Government securities Bond yield curve beyond the 10 years (tenor) which will encourage foreign investors to invest in Sri Lanka bonds. Countries with active longer tenor yield curves have been benefited from FDI.

Risk premia and the European government bond market: new empirical evidence and some thoughts from the perspective of the life insurance industry

We study yield spreads between government bonds in the European Monetary Union. This segment of the global fixed income market is of particular importance for insurance companies in Europe. Our empirical research strategy is inspired by Gunay (2020) who has analyzed the relationship between credit and liquidity risk in the United States using Granger causality tests. More specifically, we employ the procedure developed by Toda and Yamamoto (1995) to test for Granger causality among yield spreads in five different member countries of the European Monetary Union (namely Austria, Belgium, France, Italy and Ireland) relative to Germany. We examine interest rate data from bonds with three different maturities (5, 10 and 30 years). Given the importance of long-term bonds as asset class for European life insurers and pension funds, the empirical results from the often ignored market for government bonds with a maturity of 30 years should be of interest. With regard to long-term sovereign debt, there is no evidence for Granger causality among the time series examined here. Consequently, the risk premia required by investors to hold government bonds of one specific member country of the EMU do not help to forecast the risk premia that have to be paid by other countries. Given the structure of their liabilities, this empirical finding should be of high relevance for portfolio and risk managers in the European life insurance industry and in pension funds. With regard to the yield spreads to be observed in the market for 10-year government bonds, there seems to be no clear picture. Focusing on fixed income securities with a maturity of 5 years, there is one very interesting empirical finding. The test results reported here seem to imply that there is unidirectional Granger causality running from the yield spreads in all other four countries to Austria. Given that Austria is a comparably small country which is assumed to be in a fiscally stable position, this result could be interpreted as evidence for credit risk premia as being helpful to forecast liquidity risk premia in the market for medium-term government bonds issued by member states of the European Monetary Union.

Central Exchanges for Government Bonds? Evidence during COVID-19

In March 2020, government bond markets experienced severe illiquidity. Since then, regulators debate market reforms. One way to enhance liquidity could be to let government bonds, like stocks, be traded on central exchanges. We assess this reform with price data of the U.S, U.K., German, Japanese, and Israeli government bond and stock markets. We leverage a unique institutional feature of the Israeli government bond market---that it already operates on an exchange---to test whether and by how much having an exchange affected bid-ask spreads in March 2020 via difference-in-difference analyses. Our findings suggest that spreads in government bond markets without exchanges would have been 30%-60% lower if there had been an exchange. This implies higher liquidity and provides support in favor of the market reform.

Liquidity of China’s Government Bond Market: Measures and Driving Forces

We construct a daily liquidity index of China’s government bond market using transaction data from the national interbank market over the past twenty years. The index is a composite of popular price-based and quantity-based metrics of liquidity. The composite indexes, obtained by averaging across different metrics or by applying principal component analysis, both point to a better liquidity condition after 2010. Market liquidity swings appear to be highly correlated with domestic funding liquidity and financial market volatility, but display less correlation to global macrofinancial indicators. Our findings suggest that further deepening of government bond market would support domestic financial stability and monetary operations down the road.