Government Bond Yields Research Articles

STUDY OF RISING BENCHMARK 10-YEAR BOND YIELD AND ITS RELEVANCE TO ECONOMIC FACTORS

The paper reviews the increasing benchmark 10-year bond yield. It mentions the factors which are contributing towards the increase in bond yields and also the impact of rising bond yield on the Indian economy. The bond yield has impact on stock market, debt market and the currency of a country. The government bond yield of a country helps to understand the state of its economy and it is often compared with bond yields of other countries as well. The health of a country's economy is indicated by inflation, lending rate of the central bank, GDP growth rate, and national income and this can be analysed by an economist through Conventional metrics. The objective of paper is to understand the rising bond yield (benchmark) and factors affecting the Indian economy and study the correlation and influence of economic parameters such as Sensex, Nifty, FII, DII, CPI, India VIX and exchange rate. The secondary data of five years is being used for the study and the data is being further analysed by using statistical tools using SPSS software. The finding shows that for developing country like India how government is among the biggest investors in the economy, so for assessing economic health of the country, bond yields can be a useful parameter. Economists use conventional matrices for measuring the health of a country's economy which includes inflation, lending rate of the central bank, growth rate, and national income. These are further measured by as Sensex, Nifty, FII, DII, CPI, India VIX and exchange rate. However, bond yields are also a very perceptive means of evaluating the trajectory of an economy. As investors sell government bonds, prices decrease and yields increase. A higher yield indicates greater risk. If the yield offered by a bond is much higher than what it was when issued, there is a chance that the company or government that issued it is financially stressed and may not be able to repay the capital.

Quantitative easing and government bonds: evidence from the EU

This paper examines the relationship of quantitative easing policy programs, government bond yields and banking stock price returns for the EU periphery. The aim is to estimate and to analyse the effect of the ECB's QE policy on government bond yields and banking stock prices. The dataset consist of monthly panel data observations spanning from January 2008 until September 2017. The empirical part utilises the difference-in-differences methodology. The findings suggest that the implementation of QE has positive effects, by decreasing the bond yields for the periphery countries that participated in the program; there were no effects noted for banking returns. Additional macroeconomic variables are included, where a reduction in government debt and unemployment and a raise in industrial production, tax revenues and FDI lead to lower government bond yields and to higher banking returns. The research provides to investors and government regulators empirical insights into the effects that QE policies have.

Winners and Losers from Sovereign Debt Inflows: Evidence from the Stock Market

We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries which are due to the announcements of these countries' inclusion in two major local currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous spillovers on domestic firms. Financial and government-related firms experience positive abnormal returns in the days following the announcement episodes. Instead, companies operating in tradable industries exhibit negative abnormal returns after the episodes. We find that the former expansionary effect is more pronounced in countries where the government bond yields drop more in response to the announcement, while the latter recessionary effect is larger in countries where the domestic currency appreciates more. Also, we find that firms which rely more on external financing are positively affected by these events. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in recipient countries. They suggest that these inflows can contribute to reshaping the domestic economy, by increasing the importance of the non-tradable sector at the expenses of the tradable one.

Discussion

Discussion

Spillover Effects from the ECB‘s Unconventional Monetary Policies: The Case of Denmark, Norway and Sweden

Using event-study techniques we investigate the impact of ECB’s announcements of nonstandard policy measures on a broad range of financial assets from Denmark, Norway and Sweden. We find evidence that unconventional monetary policy announcements by the ECB resulted in pronounced spillovers to Denmark, Norway and Sweden. In particular, our results suggest that medium- and long-term government bond yields, corporate bond yields and CDS spreads were affected by ECB’s announcements of non-standard policy measures. Our empirical results indicate that the portfolio rebalancing channel played an important role in the transmission of ECB’s non-standard policy measures on mediumand long-term government bonds and corporate bond yields. However, it also seems that declining government bond yields transmitted to decreasing corporate bond yields. Moreover, our results suggest that benchmark stock market indices and exchange rates vis-A -vis the euro were mainly unaffected by ECB’s announcements of unconventional monetary policies. Furthermore, we find pronounced spillover effects from Forward Guidance statements, Securities Markets Programme announcements, and Corporate Sector Purchase Programme announcements on financial assets from Denmark, Norway and Sweden. Though, our results highly depend on the monetary policy surprise measure used in our regressions and the degree of policy anticipationKeywords: Budgetary Policy, Capital Taxation Rate, Consumption Taxation Rate, DSGE Model, Labor Taxation Rate, Wages Rigidity

Yield Spread Determinants & Reaction to Negative Event-shocks and Downgrades: The Case of Greece

The purpose of my study is to investigate the significance in the determination and worseness of ten year government bond yields spreads as well as the variation in the level of these spreads, factors like political risk and sovereign downgrades, considered as political and economic negative shocks in Greek economy during financial and public sector’s debt crisis. By extension to the main research, it is examined if shocks affected yields of two key sub-indexes of Athens Stock Exchange, ATHEX/FTSE large cap and ATHEX/Banks. The study extends from 1/1/2008 to 8/28/2015. My study is conducted in two stages, with similar goals. In this paper, I firstly investigate the role of significant, negatively signed political and economic events as well as sovereign downgrades, concerning Greece, in the determination of Greek ten-year bond spreads. In addition to the main research, I examine the influence of these negative shock-events in the yields of ATHEX/FTSE large cap index and ATHEX/Banks index. For this purpose, I make a series of regressions, since most studies analyzing the determinants of bond yield spreads rely on simple linear regression models and use OLS method of regression, as well. Secondly, I make an event-study, in Excel, on cumulative yields of the two latter indexes and on the yields of Greek bonds’ spreads and their movements ten days before and ten days after events and credit ratings that took place throughout the sample period. For the needs of the study, I reassess all models as well as the event study for three sub-time periods, namely “pre-crisis” period, from 1/1/2008 to 5/5/2010, “mid-crisis” period, from 5/6/2010 to 12/16/2014 and “new-crisis” period, from 12/17/2014 to 8/28/2015. Overall, the results that gave this empirical analysis seem to be very useful for politicians, for market makers and for market participants. It is mentioned that the evidence and conclusions occurred in the first part of this empirical analysis are confirmed, since they are in agreement with the findings of the event study that is in the second part of my research. Concluding, Greek government bond yield spreads are influenced from shock events and downgrades, mainly, during new crisis and pre-crisis period, respectively. Throughout the mid-crisis period neither yields of Athens stock Exchange indexes nor negatively signed shock events, including ratings, could cause a significant movement in spreads. This maybe means that, during this period, only other risk, fundamental or macroeconomic parameters could affect spreads. Especially from results of event study occurs the exact way that bond yield spreads and the yields of ATHEX/FTSE large cap and ATHEX/Banks indexes reacted ten days before and since an event-shock happened. The observed significant movements of spreads and the abnormal yields of indexes before the shock maybe indicates a leakage of information or a good prediction ability of market, while the noticed abnormal movements of spreads and yields after the event-day reflect the way of investors’ reaction in shocks.

Investing in US 10-Year Yields with News Sentiment

The tonality of news reporting has been shown to have explanatory and predictive power for equity prices. Using a novel approach and data set, the authors demonstrate that the news sentiment effect also holds for US government bond duration. They construct a successful trading strategy for the US 10-year government bond yield based on news sentiment.

What does unconventional monetary policy do to stock markets in the euro area?

AbstractThis paper investigates the impact of the European Central Bank's unconventional monetary surprises on major European stock markets. Three measures for surprises are used: (a) the change in domestic 10‐year government bond yields, (b) the change in the spread between German and Italian (Spanish) 10‐year bond yields, and (c) the change in yields of a safe euro‐denominated asset, such as German bonds. I show that unconventional monetary policy surprises significantly influence stock returns. For instance, monetary decisions that cause a decrease in Italian (Spanish) sovereign spread led to an increase in the stock returns. In addition, I find that a positively surprising shock—a fall in the domestic bond yield and an increase in German interest rates—leads to higher stock returns. Finally, sovereign spreads seemed to have larger effects on stock returns both during crisis and postcrisis years.

Macroeconomic Effects of Government Spending: The Great Recession was (Really) Different

AbstractWe estimate the effect of government spending shocks on the U.S. economy with a time‐varying parameter vector autoregression. The recent Great Recession period appears to be characterized by uniquely large impulse responses of output to fiscal shocks. Moreover, the particularity of this period is underlined by highly unusual responses of several other variables. The pattern of fiscal shock responses neither completely fits the predictions of the New Keynesian model of an economy subject to the zero lower bound on nominal interest rates, nor does it suggest regular variation of fiscal policy effects depending on the state of the business cycle. Rather, the Great Recession period seems special in that government spending shocks had a strongly negative effect on the spread between corporate and government bond yields and a strongly positive effect on consumer confidence and private consumption spending.

Quantitative Easing: A Postmortem

The unconventional monetary policy of the Federal Reserve (Fed) during the global financial crisis of 2007–2009 and its aftermath is often credited with averting another Great Depression. The Fed’s interventions unfolded over two periods, which can be distinguished with regards to the particular tools employed and goals pursued. Lowering risk and liquidity premiums by propping up the prices of private assets was deemed essential for restoring the flow of credit and the orderly function of financial markets during the first period and in the early months of the second period. Reducing interest-rate spreads for the purpose of lowering borrowing costs and boosting total spending in the economy became a major goal of monetary policy during the second period. The purpose of monetary policy changed over time, but the targeted channels of its effects remained largely unaltered. While conventional monetary policy targets interest rates, unconventional monetary policy targeted asset prices. Starting with an overview of the two periods in the conduct of monetary policy, this article explores the theoretical justifications and practical implications of unconventional monetary policy. It further interrogates the effects of the Fed’s policies on government bond yields and asset prices as well as their macroeconomic and distributional effects. A key observation is that the effects of quantitative easing have been most acutely felt not in a revival of domestic investment and employment but in the staggering distortions in asset prices domestically and globally. The macroeconomic effects of unconventional monetary policy pale in comparison with its distributional effects.

DSGE Model of the Russian Economy: Economic Impact of Oil Price

In the paper the DSGE model proposed on the base of the theory of adaptive expectations. The aim of this work is to describe the possibility of using DSGE models for forecasting the Russian economy. This paper examines how the methodology of dynamic stochastic general equilibrium models can be applied to predict the yields of government bonds in 2018-2020, the proposed modification of the Taylor rule and the components of the prediction rate of the Russian ruble, characteristic of resource economies, where there is a close relationship between the exchange rate and oil price. It proposed the forecast of main macroeconomic indicators in the period 2017-2020 years (economic growth, inflation, oil price, exchange rate, Bank of Russia key rate and effective yields of government bonds). The practical significance of this work lies in the structuring of existing knowledge on the applicability of DSGE models of the Russian economy. The article also outlines the macroeconomic trends and modeling the conditions of an unstable economic situation in Russia. The parameters of monetary policy are also significant for determining the government bond yields. In addition, this article sheds light on forecasting the term structure of interest rates based on macroeconomic indicators.

China's Interest Rate Pass-Through To Government Bonds And Monetary Independence

The monetary policy has been a main driver of China's economic growth. Strong evidence shows China's monetary policy is designed to support real GDP growth. There are various and complicated monetary transmission channels. This study examines the relation between monetary independence and interest rate pass-through to government bonds in China. The sensitivity coefficients between government bond yields and the People's Bank of China's (PBC) policy rate FR007 are obtained through a series of univariate 200-trading-day rolling regressions between bond yields with different maturities and FR007. The Monetary Independence (MI) is measured as the reciprocal of the correlation of interest rates in China and the United States. 200-trading-day correlations are calculated using daily interest rate data. A simple regressions model is employed to test the relations between sensitivity coefficients and MI. The time period is between January 4, 2013 and November 30, 2016. The empirical results show that China's monetary independence is positively associated with China's interest rate pass-through to government bonds. This relation is also robust to various tests on the presence of outliers and causality. It means that the higher China's monetary independence, the greater China's interest rate pass-through to government bonds. During March 2016 – November 2016, China had been continuously suffering great capital outflows. China's monetary independence had dropped significantly during this period, and at the same time China's interest rate pass-through to government bonds had totally disappeared. The Impossible Trinity theory may provide the answer. In reality, the Chinese authorities have helped establish multiplier mechanisms that jeopardize both monetary autonomy and exchange-rate stability. The Chinese policy-makers such as finance minister Lou Jiwei also conceded that China's monetary tools were becoming less effective. Based on this study's findings, the PBC is suggested to relax its control of the exchange rate regime in order to increase the independence of the Chinese monetary policy. Accordingly, China's interest rate pass-through to government bonds will be improved, and Chinese economic growth will be more sustainable.

Performance of Bond Ladder Strategies: Evidence from a Period of Low Interest Rates

Based on German government bond yields, this paper analyses the performance of laddered strategies during a period of low interest rates. Relying on the REX, Germany’s leading bond index, laddered cash flows are created, and maturity structures are systematically changed. A constructed rolling window of annual returns reveals that risk and return significantly increase with the length of maturity. Performance measures, such as return on risk-adjusted capital and the Sharpe ratio, show that long-term bond ladders significantly dominate short-term ladders. However, for upward movements in the average yield level, the dominance is reduced. The results imply that portfolio managers should consider performance characteristics in maturity decisions as well as expectations of changes in the yield level.

Liquidity pull-back and predictability of government security yield volatility

This paper investigates the relationship between the volatility of government bond yields and liquidity using daily data. We introduce a novel measure of liquidity called Repo Spread created from Reserve Bank of India's recent liquidity operation called Term Repo Operation. The result indicates that liquidity variable has significant explanatory power on the volatility of security yields. Further, we find Repo Spread has significant predictive power on the volatility of government security yields.

Economic volatility and sovereign yields’ determinants: a time-varying approach

Using monthly data for 10 euro area countries between 1999:01 and 2015:12, we take a new three-step methodological approach: first, we inspect the key determinants of 10-year government bond yield spreads; second, we compute country-specific time-varying coefficient models of spreads’ determinants; third, we use these estimates as explanatory variables in panel regressions using output volatility as the dependent variable. We find that better fiscal positions or higher-than-expected economic growth prospects reduce the yield spreads, while increases in the VIX, bid-ask spread, debt-to-GDP ratio or real effective exchange rate appreciation increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the global financial crisis. Finally, for the case of the budget balance and real growth (bid-ask spread, debt-to-GDP ratio, real effective exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) the economic volatility.

Implication of Macroeconomic Factors to Stock Returns of Indonesian Property and Real Estate Companies

This study aims to identify the effect of interest rate change policy made by Bank Indonesia during the period of January 2010-March 2016 to stock return of the property sector and real estate. In addition, this study also aims to test whether fluctuations in government bond yields, inflation, and indigo exchange also affect the stock returns of the property sector and real estate in Indonesia. By using purposive sampling, there are 15 companies that will be used as research samples. By using multiple linear regression analysis, there is no significant negative effect of interest rate (BI Rate) and inflation on stock return of the property sector and real estate. Nevertheless, it was found that the variable fluctuation of government bond yield and dollar exchange rate against rupiah had a negative and significant effect on stock returns of property and real estate sector in Indonesia. Increased bond yield would make investors choose other instruments as an alternative to investing money. In addition, investors also tend to choose to save money in the form of US Dollar rather than investing money in the capital market, further with the weakening of the value of the rupiah will increase the amount of foreign debt from the company.

Explosive behaviour and long memory with an application to European bond yield spreads

AbstractThis article deals with the interplay of explosive behaviour and long memory. We conduct Monte Carlo simulations and study the finite‐sample properties of the popular unit root test by Phillips et al. (2011) against explosive alternatives. This test exhibits severe upward size distortions under the presence of strongly autocorrelated residuals. We propose the usage of a set of adjusted critical values which leads to a size‐controlled test with increased power. As a complement, we consider the Lagrange Multiplier test against long memory by Tanaka (1999). We study European government bond yield spreads during the financial crisis.

The Dynamics of Japanese Government Bondss Nominal Yields

This paper employs a Keynesian perspective to explain why Japanese government bonds' (JGBs) nominal yields have been low for more than two decades. It deploys several vector error correction (VEC) models to estimate long-term government bond yields. It shows that the low short-term interest rate, induced by the Bank of Japan's (BoJ) accommodative monetary policy, is mainly responsible for keeping long-term JGBs' nominal yields exceptionally low for a protracted period. The results also demonstrate that higher government debt and deficit ratios do not exert upward pressure on JGBs' nominal yields. These findings are relevant to ongoing policy debates in Japan and other advanced countries about government bond yields, fiscal sustainability, fiscal policy, functional finance, monetary policy, and financial stability.

The Long-Run Determinants of Indian Government Bond Yields (Presentation Slides)

Presentation of paper examining how Indian long-term government bond yields are affected by changes in short term bond yields and fiscal policy variables. The models estimated show that in India the short-term interest rate is the key driver of the long-term government bond yield over the long-run. The government debt ratio does not have any discernible adverse effect on IGBs’ yields over the long-run.

Market Risk Premium and Risk-Free Rate used for 59 Countries in 2018: A Survey

This paper contains the statistics of a survey about the Risk-Free Rate (RF) and the Market Risk Premium (MRP) used in 2018 for 59 countries. We got answers for 73 countries, but we only report the results for 59 countries with more than 5 answers. The change between 2015 and 2018 of the average Km (RF + MRP) used was higher than 1% for 22 countries (see table 5). Most of the respondents use for European countries a RF higher than the yield of the 10-year Government bonds. Due to “Quantitative Easing”, the RF and the MRP reported for some countries are negatively correlated (Spain, Germany, Netherlands, Norway). The coefficient of variation (standard deviation/average) of Km is lower than the one of MRP and RF for 35 countries. For the first time of this survey, 11 respondents provided - without being asked for - a different MRP for Spain and Catalonia (on average, 6,7% for Spain and 11,3% for Catalonia).