Government Bond Market Research Articles

The Impact of Monetary Policy on the Liquidity of Bond Market——Based on Chinese Local Government Bond Market

The bond market serves dual roles in fiscal and financial spheres, playing a crucial role in coordinating monetary policy. This paper investigates the impact of quantitative and price-based monetary policies on the liquidity level of China’s bond market. A comprehensive index measuring the liquidity of the local bond market is constructed using a combination weighting method that integrates the entropy method and the coefficient of variation. Employing the time-varying stochastic volatility structure vector autoregression (TVP-SV-SVAR) model on data spanning from 2013 to 2021, the study empirically compares the impulse response of local bond market liquidity to monetary policy shocks. Findings reveal that both types of monetary policy operations exhibit asymmetric, nonlinear, and time-varying impacts on bond market liquidity. Quantitative monetary instruments induce deeper impulse responses, with longer-lasting effects. These conclusions offer insights for monetary policy reforms and bond market development in China.

Effect of Market-Wide Investor Sentiment on South African Government Bond Indices of Varying Maturities under Changing Market Conditions

The excess levels of investor participation coupled with irrational behaviour in the South African bond market causes excess volatility, which in turn exposes investors to losses. Consequently, the study aims to examine the effect of market-wide investor sentiment on government bond index returns of varying maturities under changing market conditions. This study constructs a new market-wide investor sentiment index for South Africa and uses the two-state Markov regime-switching model for the sample period 2007/03 to 2024/01. The findings illustrate that the effect investor sentiment has on government bond indices returns of varying maturities is regime-specific and time-varying. For instance, the 1–3-year government index return and the over-12-year government bond index were negatively affected by investor sentiment in a bull market condition and not in a bear market condition. Moreover, the bullish market condition prevailed among the returns of selected government bond indices of varying maturities. The findings suggest that the government bond market is adaptive, as proposed by AMH, and contains alternating efficiencies. The study contributes to the emerging market literature, which is limited. That being said, it uses market-wide investor sentiment as a tool to make pronunciations on asset selection, portfolio formulation, and portfolio diversification, which assists in limiting investor losses. Moreover, the findings of the study contribute to settling the debate surrounding the efficiency of bond markets and the effect between market-wide sentiment and bond index returns in South Africa. That being said, it is nonlinear, which is a better modelled using nonlinear models and alternates with market conditions, making the government bond market adaptive.

Dollar and government bond liquidity: Evidence from Korea

Using unique tick-by-tick data from an exchange, this paper examines the relationship between the US dollar and liquidity in the Korean government (Treasury) bond market. We find that a strong US dollar deteriorates the Treasury market's liquidity by increasing the bid-ask spread and the price impact and lowering market depth. The effects of fluctuations in the broad US dollar index on Treasury market liquidity become more pronounced when funding liquidity conditions are tighter, when banks' total capital ratio is lower with greater foreign currency risk, or when there is a larger sell-off of Korea Treasury bonds by foreign investors. The empirical evidence supports the financial channel of exchange rates affecting Treasury market liquidity. In particular, a strong dollar as a barometer of global financial conditions is likely to limit the market intermediation capacity of emerging market dealers and thus tighten emerging market conditions.

CORPORATE BOND MARKET IN INDIA: A REVIEW OF FACTORS LIMITING THE DEVELOPMENT

The corporate bond market helps the companies raise long-term finance, which is essential external source of capital. The Indian corporate bond market is still in its early stages of development, and as a result, it lacks the depth found in more mature markets. This paper aims to understand the factors that have limited the development of the corporate bond market in India. In addition, the paper examines the requirements for corporate bond market development, where the government bond market is doing quite well. This paper is designed as a literature review previously attempted to elaborate on the current state of corporate bond markets. The research is limited to previous studies and secondary data. Based on the literature review from previous studies and recently available market statistics, the main factors that constrain the development of Indian corporate bond markets are performance metrics, corporate governance, opacity to information and credit rating mechanism, financial infrastructure, and cost associated with issuance influence the corporate bond markets. The Indian government and Reserve bank have simultaneously tried to develop the corporate bond market.

Stripping the Swiss discount curve using kernel ridge regression

We analyze and implement the kernel ridge regression (KR) method developed in Filipovic et al. (Stripping the discount curve—a robust machine learning approach. Swiss Finance Institute Research Paper No. 22–24. SSRN. https://ssrn.com/abstract=4058150, 2022) to estimate the risk-free discount curve for the Swiss government bond market. We show that the insurance industry standard Smith–Wilson method is a special case of the KR framework. We recapitulate the curve estimation methods of the Swiss Solvency Test (SST) and the Swiss National Bank (SNB). In an extensive empirical study covering the years 2010–2022 we compare the KR curves with the SST and SNB curves. The KR method proves to be robust, flexible, transparent, reproducible and easy to implement, and outperforms the benchmarks in- and out-of-sample. We show the limitations of all methods for extrapolating the yield curve and propose possible solutions for the extrapolation problem. We conclude that the KR method is the preferred method for estimating the discount curve.

Ways to Increase the Efficiency of Investment Activities of Insurance Companies in Uzbekistan

This article aims to develop scientific and methodological proposals and practical recommendations to improve the methodology for assessing the effectiveness of investment activities of insurance organizations. The work uses scientific methods for studying the processes of economic reality - systematic analysis, generalization, grouping, observation, logical and comparative methods of analysis, abstract logical thinking, comparative analysis, mathematical modeling, econometric analysis, actuarial calculations, etc. Based on the systematization of information on investment activities, investment policies, and experience of insurance companies in developed countries, the use of statistical and mathematical methods of data processing, diversification of the financial and investment activities of insurance companies, recommendations, and indicators used to assess the effectiveness of insurance companies have been developed, identified and classified into individual areas, external and internal factors influencing the financial stability of insurance organizations, the possibilities of increasing the amount of profit they receive are substantiated, proposals are given to improve the methodology for managing the investment portfolio of insurance companies, and prospects for the development of modern options for investment activities are identified. The effective organization of the mechanism for monitoring the financial stability of insurance companies allows for minimizing the level of missed opportunities in achieving the company’s strategic goals based on econometric forecasting of financial stability and assessment of financial risks. In order to strengthen the role of insurance companies in increasing the investment potential of the country Uzbekistan, it is proposed to develop the securities market, the market for government, corporate, and municipal bonds.

Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy

We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific safety premia, we find that Sveriges Riksbank’s bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB’s QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects.

Central bank asset purchases and lending: Impact on search frictions

We investigate the impact of two central bank policies, asset purchases and asset lending, on the search frictions in the government bond market in Japan. We build a search-theoretic model to explore the impact of a central bank’s securities lending facility (SLF) by introducing a central bank as a lender. We test model predictions using intraday data from an electronic platform for Japanese government bonds. First, we find large-scale asset purchases (LSAPs) increase order imbalance in the repurchase agreement (repo) market. Threshold analysis reveals that asset purchase amounts exceeding 0.18% of the outstanding, which corresponds to 38.98% of our sample, cause a significantly higher imbalance. Second, the SLF has a floor effect on the repo rate by affecting dealers’ choices between the repo market and the SLF. Third, the novel friction measures we test show that LSAPs and the SLF have opposite influences on bargaining power in the repo market.

How the COVID-19 pandemic affected the investment characteristics of Indonesian government bond market

How the COVID-19 pandemic affected the investment characteristics of Indonesian government bond market

Research on Abnormal Volatility in The Japanese Government Bond Futures Markets– Policy based on yield curve control

Historically, central banks in the United States, the United Kingdom, Australia and Japan have implemented Yield Curve Control (hereinafter referred to as YCC), and Japan is currently the only country in the world that is still pushing ahead with YCC. However, given that the implementation and implementation of the YCC showed more defects than profits, on June 15, 2022, there was an unusual fluctuation in the Japanese government bond futures market, Japan’s 10-year government bond future contracts fell by 2.01 yen, touching the melting point in the plate, the largest single-day drop in 2013. This article introduces the basic framework of the yield rate curve and its way of buying bonds, then elaborates on the operation of the Central Bank of Japan to buy bonds in 2022, analyses the abnormal fluctuations in the Japanese government bond futures market in 2022 and identifies the contradictions and limitations of the government bond market as the root cause of the fluctuation.

Foreign Investor Dynamics in the Korean Government Bond Market: A Comprehensive Analysis and Policy Implications

Foreign Investor Dynamics in the Korean Government Bond Market: A Comprehensive Analysis and Policy Implications

Bond market development and economic growth nexus in developing countries: a GMM approach

PurposeThis study examines the nexus of bond market development and economic growth from 2015 to 2022.Design/methodology/approachThe system-generalized method of moments (GMM) is employed on economic growth, government market capitalization, corporate market capitalization, bond yield, interest rate spread, trade openness and investment level.FindingsThe findings show that the government bond market, corporate bond capitalization and bond yield positively impact the gross domestic product (GDP). The results equally reveal a causal link between the corporate bond market, bond yield and GDP.Research limitations/implicationsGovernments should emphasize creating, developing and sustaining bond markets in the economies of developing countries to boost economic activity by promoting structural transformation. Policymakers should improve the implementation of existing rules and regulations while complementing them with new ones since well-developed bond markets provide alternative sources of financing that make economies financially resilient. Policymakers should encourage the issuance of corporate bonds to enhance the efficiency of the capital markets and mobilize funds for economic growth stimulation. Governments and corporations should diversify their sources of funding into the bond markets since the bond yields are favorable to economic growth.Originality/valueEarlier studies presented arguable results on the bond market development and economic growth nexus. Several findings indicate a positive link; others give a negative link between bond market development and economic growth. Some show causal directions, while other reveal none. The contradictory results motivate research. This research results contribute to the literature in that the government bond market, corporate bond capitalization and bond yield positively impact the GDP of developing nations.

Clustering effects and evolution of the global major 10-year government bond market structure: A network perspective

This paper takes the 10-year government bond yields of 40 important economies in the world as the research object, aiming to establish a global major government bond market network based on the graph approach and construct an evaluation system to understand the clustering effects of different economies in some important global financial events and the evolution of market structure. Based on the rich information provided by the minimum spanning tree and planar maximally filtered graph, our empirical research results indicate that economies in the government bond market network exhibit clustering effects due to geographical proximity and similar yield levels. The GIIPS economies in Europe formed a core cluster during the European debt crisis period and the initial stage of the COVID-19 outbreak and formed clustering effects with other high-yield economies. In the initial stage of Sino-US trade friction, the market formed the phenomenon of European-American clusters and Asia-Pacific clusters. We also observed that in the complete research interval from 2010 to 2021, Germany and Netherlands had the strongest centrality, while the two largest economies in the world, the United States and China, also maintained close connections with them in the network structure. Through the interdisciplinary graph network approach, we hope to provide an effective perspective to observe and monitor the operation of the global government bond market.

Do preferred habitat investors exist? Evidence from the UK government bond market

The existence of investors with non-pecuniary preferences for particular assets is central to the rationale and efficacy of unconventional monetary policies. Using a new, granular dataset for the UK government bond (gilt) market, we identify preferred habitat behaviour directly from the amount of variation investors allow in the average duration of their gilt portfolios. We find investors with particular duration habitats exist across the yield curve. These investors can be reasonably proxied by specific sectors - like foreign central banks, insurance companies and pension funds - and their behaviour conforms to a number of predictions from preferred habitat theory.

Determining the combined effect of financial system architecture, macroeconomic factors and governance on the development of local currency government bond market in Kenya

This study sought to examine the current state of the local currency government bond market in Kenya to determine the effects of financial system structure, macro-economic factors and the country’s governance on its development. The study used secondary data from the World Bank’s WDI and DataStream databases for the period 1998 to 2019. Descriptive statistics - applying trend analysis, measures of central tendency and dispersion and documents analysis were employed to conduct a stocktaking of Kenya's government bond market development since its inception, while multiple linear time series regression using Ordinary Least Square (OLS) technique was employed to examine the determinants of the government bond market development in Kenya. In the findings, the combined model, corporate bond, political stability and general election were largely positively significant. Bank credit to the private sector and fiscal balance were positively significant, whereas inflation and interest capping were negatively significant at a 5 per cent confidence level. GDP_ growth rate was significant at 10 per cent. The study thus recommends that the government's efforts should focus towards building the financial markets, controlling its micro and macro-economic factors and building a strong administrative structure in its quest to achieve its Vision 2030 objectives of financial independence. It is this structure that will encourage bond market growth and liquidity that will, in future, enable them to achieve financial independence.

Activities of banks on the DGB market

The article focuses attention on the study of securities placed exclusively on domestic capital markets and highlights the role and importance of banks in this case First, the work analyzed the essence of the functioning of domestic government bonds. DGB belongs to debt securities that are sold to primary dealers and their clients on the primary market to finance the needs of the state budget. The work specifies the requirements for banks that can be primary dealers and the rating of domestic banks-primary dealers. A survey of domestic government bonds market was carried out, which are in circulation at nominal and amortized cost by owners, and it was found that during the last 5 years, banks occupied one of the leading places in the structure of their owners. It was revealed that the share of DGB in the total assets of domestic banking institutions is at a sufficiently high level, which is due to the significant reliability of these securities. The activities of securities traders - banks with the largest volume of completed and concluded exchange contracts with the DGB on the stock and over-the-counter markets in 2020 - are highlighted, and the banks that occupy the leading positions according to the indicated indicators are identified. However, the war introduced changes оn the activity of the domestic financial market, which were reflected in the activities of banking institutions and the functioning of the DGB, in particular, auctions for the sale of military bonds were launched.

The Instability of the Market for Government Bonds in the EMU

Abstract The introduction of the Transmission Protection Instrument is the latest evidence, that the EMU is confronted with unstable markets for government bonds. Based on a parsimonious model of the government bond market, I argue, that this results from the introduction of the euro, which has homogenized government bonds. Now, several easily substitutable bonds are traded at the same time. Investors sort according to return and risk instead of along currencies. This self-selection, however, creates instability in crises. Price convergence and sorting characterized the first decade of the euro, instability the second.

The Yield and Market Function Effects of the Reserve Bank of Australia's Bond Purchases*

We examine the effect on government bond yields of three policy measures by the Reserve Bank of Australia implemented following the onset of the COVID‐19 pandemic. We also assess their impact on bond market functioning. The measures were purchases to support government bond market function over early 2020, the yield target on 3‐year Australian government bonds, and the bond purchase programme to lower longer‐term yields from late 2020 through early 2022. For purchases to support market function, we find that the announcement lowered short‐dated Australian Government Securities (AGS) yields but did not lower longer‐dated AGS yields. We also find that purchases led to lower yields as and when they were implemented and that they supported market function by lowering bid–offer spreads. For the yield target, we find a substantial announcement effect and moderate implementation effects on yields. Conversely, the yield target appears to have detrimentally affected some aspects of the bond market function. For the bond purchase programme, we find an announcement effect of approximately 30 basis points for longer‐term AGS yields; however, any implementation effects were small and temporary.

Global Bond Allocation Using Duration Times Spread

The duration times the credit spread of a bond, denoted DTS, is an effective proxy for its price variance. On an aggregate level, the measure is key to specifying the covariance between bond prices as well. Using a sample of government bond market indices, the author shows that the duration and spread, both on an index level, explain the largest share of the price variance and covariance between government bond markets. The bonds in the indices are denominated in local currency and are hedged against exchange-rate risk. The findings provide new insights for managing bond risk in globally invested portfolios.

Municipal bond volatility spillover modeling with COVID-19 effects by hybrid integration of GARCH and machine learning: The connectedness of U.S. states and South African bond markets

After the passage of the United States Africa Growth and Opportunity Act (AGOA), the emerging market economy of South Africa (SA) recorded substantial increases in duty-free exports to the U.S. Any loss or disruption of AGOA privileges could undermine SA as a trade partner with designated states in the U.S. For U.S. states most affected by the passage of the 2017-2018 Tax Cuts and Jobs Act (e.g., SALT states) along with the COVID-19 pandemic effects, the elimination of the tax exemption impacted how state governments assist in funding international trade. This paper presents a novel hybrid EGARCH conditional volatility and artificial neural network model to map the COVID-19 effect on volatility spillovers between the SA government bond market and state-issued U.S. municipal bonds traded in secondary markets. Our empirical investigation provides three innovations. First, this study addresses illiquidity and informed trading impairments by observing over 11.5 million municipal bond trades. Second, we provide new evidence that a radial basis function artificial neural network enhanced by conditional volatility and fundamental factors can effectively map the geographical bond market spillover transmission between SA and individual U.S. states. Third, on state-based muni trades, we report how the AR (1) process is weighted positively across all East coast states during the global pandemic. Lastly, the study details how COVID-19 and South African conditional volatility impacted the returns of recorded trades of municipal bonds in SALT states. A global summary of the findings concludes with a discussion of how precious metals trading contributes to the performance of state-based municipal bonds.