Government Bond Yields Research Articles

РОЛЬ КРЕДИТНОГО КАНАЛУ В МЕХАНІЗМІ МОНЕТАРНОЇ ТРАНСМІСІЇ В УКРАЇНІ

The article provides a comprehensive analysis of the functioning of the credit channel of the monetary transmission mechanism in Ukraine in 2005–2020, defines its role, the main tasks and features of its use in the system of modern monetary regulation of the economy. It has been substantiated that the main task of managing the credit channel of the transmission mechanism is to increase the efficiency of monetary regulation by transferring monetary impulses from the central bank to the real sector of the economy in order to ensure economic growth. Criteria are determined, basic indicators are proposed and methods for assessing the effectiveness of the functioning of the credit channel of monetary transmission are improved. As a result of calculations, it was proved that in 2005–2020 in Ukraine, the credit channel of the monetary transmission mechanism had a positive effect on the growth rate of the monetary aggregate M3 and the growth rate of the real gross domestic product, while the increase in government bond yields and the share of non-performing loans had a negative impact on lending activity and the rate of lending to the economy. The main reasons for the low efficiency of using the credit channel were the deterioration of the financial condition of enterprises and households, a decrease in their creditworthiness, low demand for investment resources, a high proportion of non-performing loans, significant volumes of government bonds issued by the government and high credit risks, which made it difficult for the central bank to adopt effective decisions and constrained economic growth. The main directions of improving the management and increasing the efficiency of the functioning of the credit channel of monetary transmission in Ukraine on the basis of improving the credit and investment climate, improving the methodology for assessing credit risks, increasing the efficiency of monetary regulation and the implementation by the central bank of a monetary policy adequate to economic conditions have been identified. The forecast parameters and conditions for the effective functioning of the credit channel of the monetary transmission mechanism in Ukraine in the medium and long term are proposed.

Modelling the dynamics of long-term bonds with Kalman filter

We construct a time-consistent and arbitrage-free three-factor Vasicek model for long-term bonds. A new methodology based on a stochastic mean reversion rate which captures uncertainty in long-term bond yields is presented. To allow measurement errors to be accounted for in observed yields, the model is expressed in a state space form. Kalman filtering is then applied to filter uncertainty in the observed yields. An appropriate set of transition equations on state variables and measurement equations on observed yields are derived. Using historical market data from the US Treasury daily interest rates (March 2006 to June 2020), Germany Government bond yields (August 2000 to 15 January 2021) and Canada Government bond yields (16 January 2020 to 14 January 2021), parameters of one-, two- and three-factor models are estimated. The results indicate that the constructed Vasicek model can fit the US, Germany and Canada term structure of interest rates.

Modelling the dynamics of long-term bonds with Kalman filter

We construct a time-consistent and arbitrage-free three-factor Vasicek model for long-term bonds. A new methodology based on a stochastic mean reversion rate which captures uncertainty in long-term bond yields is presented. To allow measurement errors to be accounted for in observed yields, the model is expressed in a state space form. Kalman filtering is then applied to filter uncertainty in the observed yields. An appropriate set of transition equations on state variables and measurement equations on observed yields are derived. Using historical market data from the US Treasury daily interest rates (March 2006 to June 2020), Germany Government bond yields (August 2000 to 15 January 2021) and Canada Government bond yields (16 January 2020 to 14 January 2021), parameters of one-, two- and three-factor models are estimated. The results indicate that the constructed Vasicek model can fit the US, Germany and Canada term structure of interest rates.

Survey: Market Risk Premium and Risk-Free Rate used for 88 countries in 2021

This paper contains the statistics of a survey about the Risk-Free Rate (RF) and the Market Risk Premium (MRP) used in 2021 for 88 countries. We got answers for 92 countries, but we only report the results for 88 countries with more than 6 answers. Many respondents use for European countries a RF higher than the yield of the 10-year Government bonds. The coefficient of variation (standard deviation / average) of RF is higher than the coefficient of variation of MRP for the Euro countries. The paper also contains the links to previous years surveys, from 2008 to 2020.

Вплив пандемії COVID-19 на ринок ОВДП в Україні: стан, проблеми та перспективи розвитку

The article aims at analyzing the Ukrainian market of domestic government bonds (IGLBs) in the context of the COVID-19 pandemic; determining its state, problems and development perspectives. The development of the domestic government bonds market during the coronavirus crisis is considered; the essence and purpose of IGLBs in Ukraine are revealed; IGLBs are classified by type of use. The differences between domestic and external government bonds are determined, and the advantages of the former are indicated; peculiarities of purchasing such securities by individuals and legal entities are revealed; requirements for issuing IGLBs by issuers are indicated, and the most reliable banks engaged in this activity are enumerated; the state of the government bond market during 2018–2020 is studied; the amount of ownership, the share of buyers of securities and the purpose of their purchase for each of the entities are given; the rate and yield of domestic government bonds in Ukraine are analyzed and compared with other countries, such as the United States, Germany, France and others. The study identifies the following problems: the economic crisis caused by the COVID-19 pandemic, the inadequate legal framework on IGLBs, the low level of public awareness of these securities, and others. To overcome these problems, the following actions are suggested: counteracting the coronavirus crisis by combining the efforts of the state and local authorities, business, and the population; directing most of the financial resources in this direction; spreading economic education among the population; introducing a simplified procedure for purchasing IGLBs; and working with banks to increase the availability of bonds purchasing. Statistical data obtained from the official website of the National Bank of Ukraine make up the basis for the study.

Financial Market Effects of Asset Purchase Programs in Emerging Markets: An Early Assessment

Central banks in some emerging market and developing economies (EMDEs) have employed asset purchase programs, in many cases for the first time, in response to pandemic-induced financial market pressures. Using panel regressions, this paper examines the effects of recent announcements of asset purchase programs (APP) on financial market developments in EMDEs. The results suggest that the asset purchase programs in EMDEs have been more effective at lowering government and private sector bond yields and sovereign CDS than announcements of policy rate cuts and spillovers from advanced-economy asset purchase announcements. The reduction in bond yields driven by APP announcements was largest in economies with higher consumer price inflation, initial bond yields, and CDS spreads and did not result in currency depreciation on average. The effects are consistent with reduced risk premia being a key channel for the operation of EMDE APPs.

Convenience Yield and Real Exchange Rate Dynamics: A Present-Value Interpretation

In this paper, we empirically investigate the relationship between the convenience yield of government bonds and the real exchange rates using monthly data spanning from 1999 to 2018. We extend the conventional models, based on present-value relationship between real exchange rate and economic fundamentals, while explicitly considering the role of the convenience yield. Empirical results suggest that our present-value models are able to capture the dynamic properties of the real exchange rate documented in literature, including high persistence, and excess volatility and co-movement compared with real interest rate differentials. We also find the sum of expected convenience yields significantly drives real exchange rate movements. Moreover, we found that foreign exchange swap market friction also plays a role in explaining real exchange rates. Finally, we identified a deviation with regard to the monetary policy rule, and found that monetary policy at the zero lower bound is also significant for yen--dollar real exchange rate modeling.

Effects of Monetary Policy Communication in Emerging Market Economies: Evidence from Malaysia

By conducting a high-frequency event study similar to Gurkaynak et al. (2005), we find that two factors are needed to adequately capture the effects of monetary policy announcements for a non-inflation targeting emerging market economy, Malaysia. These factors are the surprise changes in the policy rate (Overnight Policy Rate, OPR) and the information about the future path of monetary policy. We find that the path factor has a strong influence on long-term government bond yields, corporate bond yields and spreads. Our findings are indicative of the view that monetary policy communication is mostly about revealing information pertaining to the central bank’s assessment of the economic outlook, as opposed to an unconditional binding commitment to follow a specific policy path.

IMPACT OF THE FED’S UNCONVENTIONAL MONETARY POLICY ON THE US FINANCIAL MARKET

This paper is devoted to the unconventional monetary policy measures implemented by the US Federal Reserve (Fed) after the global financial crisis. The objective is to conduct an empirical analysis and econometric study on the effects of the US Fed non-standard monetary policy measures on the US financial market, namely by observing the reaction on the US 10-year government bond yield, the US stock market via the S&P 500 index, and the exchange rate of the US dollar versus the euro (EUR/USD). The observed period spreads from January 2009 to March 2019, with the use of monthly data. It captures the Fed’s unconventional monetary policy measures, the first steps of the then planned gradual termination of quantitative easing (QE) and lifting of the interest rates, which was reverted in the course of 2019 and 2020. The results from the constructed vector error correction model suggest that Fed’s monetary policy stance continues to influence the changes in the bond yields, the S&P 500 index, and the value of the US dollar through the interest rate, the portfolio balance, and the exchange rate channels. The findings show that the process of normalization of the monetary policy regarding the future interest rates path in the US under the Fed’s monetary policy must be carefully guided. It must be consistent with the macroeconomic conditions and the state of the financial sector. The impact on the developed and emerging markets must be considered as well, with the main aim of avoiding potential serious risks.

Surging bond yields and fiscal crisis remain unlikely

▀ We expect core government bond yields to trend upwards over the next five years, but based on our modelling work, a big surge in yields looks unlikely. Even our most downbeat scenario implies only moderate rises in debt service costs, suggesting governments will be relaxed about rising yields. ▀ Core government bond yields have been low for over a decade, helped by excess global demand for certain government bonds seen as “safe assets.” But there are historical examples of yields surging after long periods during which they've been low and steady, such as in the US in the 1960s‐1970s. ▀ We ran a series of model scenarios that simulate the impact of factors such as a sharp rise in government debt, curtailed QE, reduced demand for core currencies as FX reserves, and higher inflation. Individual shocks to supply and demand for these safe assets add an extra 14bps‐70bps to yields. A combined shock adds an extra 130bps to US 10‐year yields by 2025, going to 3.5% from our baseline of 2.2% and 0.9% currently. ▀ The rises in yields generated in our scenarios look small by historical standards, although they would imply quite large price changes in bonds given the low starting level of yields. Some of the individual shocks could result in investors suffering losses similar to those in 1994 or 2013–2014. In the combined negative scenario, losses could approach those seen in 1965–1970. ▀ Rising bond yields feed into higher government debt service costs only gradually, especially when average debt maturity is long. As a result, most governments are likely to be quite relaxed about rising yields, and these should not be a big barrier to continued loose fiscal settings. Investors cannot rely on the reimposition of austerity to help limit their downside this time around.

Reactions of euro area government yields to Covid-19 related policy measure announcements by the European Commission and the European Central Bank

This paper evaluates the impact of announcements of Covid-19 related monetary and fiscal policy measures by the European Central Bank and the European Commission. Applying an event study, we find that the announcements predominantly affect the government bond yields of more solvent countries such as Germany and the Netherlands. Since this finding mainly holds for the announcements of fiscal measures, we conclude that the investors are primarily concerned about the future fiscal burden that has to be shouldered by those solvent countries within the euro area.

An evaluation of the relationship between government bond yields, exchange rates and other monetary variables : the South African case

Over the past few decades, governments have increasingly used bonds to acquire revenue to finance development and infrastructure projects. Several internal and even external factors influence the bond price as well as the bond yield rate. Developing countries use government bonds to finance developmental projects, but their bond yield rates are relatively high compared to developed countries, resulting in high levels of debt repayments. This study has the primary aim to analyse the relationship between the government bond yield and several macro-economic variables, including the exchange rate, repurchase rate, inflation and government debt. The study used South Africa as a proxy for developing countries. A quantitative methodology was used through the estimation of an econometric model using monthly time series data from 1994 to 2020. Government bond yield was selected as the dependent variable with independent variables including the exchange rate, the repo rate, inflation and government debt. Both long- and short-run relationships were found between the variables using the Johansen co-integration and vector error correction model (VECM) methods. These long-run results are important as they indicate that a depreciating exchange rate, rising interest rates and inflation, as well as rising debt levels, lead to increasing bond yields, which lead to increasing debt repayments. In conclusion, the results of the study indicated that a stable macro-economic environment is required for economic growth, while volatile exchange rates and yields do negatively affect growth; rising inflation does lead to rising repo rates, depreciating exchange rates; inflation should be contained within the inflation targets; and lastly, policy certainty is important to keep rates and yields stable, which could lead to investor confidence.

Assessing the effectiveness of the emergency liquidity assistance tool in the euro area

AbstractWe examine the role and the efficiency of the emergency liquidity assistance (ELA) tool in the Euro area which has been used to confront the contagion in the banking sector and the illiquid financial market conditions. We study four European countries (Belgium, Cyprus, Greece, and Ireland), which have received substantial ELA since the 2008 financial crisis. Through Bayesian VAR models, we seek to determine the effectiveness of national central bank lending, which includes the amount of ELA received by the domestic banking sector, an assessment of the direct effect of ELA on banks' liquidity and lending through deposits thus allowing banks to supply loans. In general, we find that the ELA tool was very effective in alleviating financial strains in these countries' central banks. For the Greek case, in particular, our findings indicate that the ELA was influenced not only from any changes in bank deposits but also from changes in the spread between the 10–year Greek and German government bond yields. Finally, the volume of non‐performing loans in Greek banks was declining to capital injections to banks as their capital base was continually being restored through the ELA mechanism.

Liquidity in Asian Financial Markets: Crowding Out or Spillover Effect

The paper attempts to explore the relationship between the stock market and the corporate bond market, with a focus on the inter-dependency of liquidity between the two markets. The study employs a panel dataset to assess the impact of stock market liquidity on the corporate bond market liquidity for top five Asian economies (ranked by GDP) for the period 2008-2017. In contrast to limited number of earlier studies that reported a spillover effect of liquidity among the markets for stock and government bonds, the results of the present study convey that an increase in stock market liquidity tends to eat up the liquidity of the corporate bonds, even after controlling for government bond yield and inflation rate changes. The findings indicate a crowding out effect instead of a spillover effect, as indicated by related studies. The ‘flight-to-quality’ argument provides one possible explanation of liquidity moving away from one market to the other. This has an implication that if regulators’ policies are focused in developing only one type of market, it may crowd out the liquidity and the development of the other market. The study suggests the government to focus more on corporate bond market, which is yet to flourish in the Asian markets as compared to its stock market counterparts. The paper is one of the few attempts that focus on the corporate bond market and its liquidity and aims to ignite a debate on the possible linkages between liquidity of corporate bond market and the stock market.

Factor decomposition of disaggregate inflation: the case of Greece

We use static and dynamic factor models to decompose Greek inflation into common components. Static factor analysis suggests the need to develop comprehensive underlying inflation measures for Greece. Dynamic factor analysis decomposes inflation into three components: pure inflation and relative price inflation both driven by aggregate shocks and, an idiosyncratic component reflecting sector specific shocks. We verify the idiosyncratic component as the main source of inflation variability while pure inflation and its associated shocks are dominant compared to relative inflation. Based on pure inflation correlations, the relative weight of anticipated monetary shocks is large only for the spread between the ten-year government bond yield and a three-month short run rate and only in times of monetary stability.

The impact of foreign capital flows on long‐term interest rates in emerging and advanced economies

AbstractThis paper explores how foreign capital flows affect domestic long‐term interest rates. This is especially important in emerging economies when compared with advanced economies. We employ panel data to infer the yields of 10‐year government bonds along with the government bond inflows associated with foreign investors. We then use a regression approach to examine the differences in the interest rate effects between emerging and advanced economies before and after the global financial crisis (GFC). The results suggest that while government bond inflows influenced the government bond yields of emerging economies after the GFC, this was not the case for them before the GFC nor in small advanced economies before or after the GFC. Further, we find the purchase (sale) of government bonds by foreign investors corresponded to large decreases (increases) in emerging economy bond yields. Overall, the findings suggest that the massive government bond inflows associated with foreign investors after the GFC exerted a significant impact on long‐term interest rates in emerging economies.

Internal Change Points and External Transmissions

The multiple change points estimation internally identifies the monetary expansion or monetary contraction, the monetary policy interchange, the currency reform breaks, and the routine operational transitions on the multivariate dimensions of the China government bond yields. The external monetary transmissions are separating into the blocks with the conventional monetary policy and zero lower bound period. The recursively identified VAR models are respectively capture the daily interest rate co-movements spreading from the global trends to the destination country in the short run restrictions, the weekly fluctuation transitions from the systematic risks and uncertainty in the financial markets in the medium run, and the monthly compounding interaction mechanism from stock market, government bond market and international monetary transmission in the long run.

The macroeconomic factors affecting government bond yield in Indonesia, Malaysia, Thailand, and the Philippines

The government bond (GB) has become the most attractive investment portfolio option, even though many macroeconomic factors affect the bond yield. This paper aims to investigate the determining factor of local currency government bond yield by considering the inflation rate, credit default swap, stock market index, exchange rate, and volatility index. This study used 240 data panel from the Bloomberg stock market in the form of data panel covering Southeast developing countries, namely Indonesia, Thailand, Malaysia, and the Philippines, for five years or sixty months from January 2015 to December 2019. Data analysis used recursive models and multivariate regression techniques using EViews software. The random effect model results revealed that change in the foreign exchange rate and volatility indexes affected, partially and simultaneously, the changes in the stock market index. The result also showed that changes in the stock market index, inflation rate, and credit default swap affected, partially and simultaneously, government bond yield changes. These results suggest that the government bond yield could be managed by controlling volatility index, foreign exchange rate, stock market index, inflation rates, and credit default swaps. This finding could provide an insight into the policymaker and fiscal authority on managing the risk of government bonds under control during high volatility or even making it reasonably lower. This result could contribute to the current research in the field of financial management. Acknowledgment It is the author’s pleasure to thank Muhammad Aulia SE MSc CSA® from the Ministry of Finance of Republic Indonesia, for his invaluable contribution to encourage this study and also to share the data required for this paper. He also delivers essential insights into improving the quality of this work. This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Chinese Influence in Australia: What Do Financial Markets Tell Us?

Australia—China relations, and especially Chinese influence in Australia, have been the subject of heated debate in Australia since 2016. The central issue is, how to balance concerns over Chinese influence in Australia with the economic benefits of Chinese trade and investment? This study—arguably the first of its kind—answers this question using rigorous empirical modelling. First, it uses Google Trends search results to measure Chinese influence in Australia. Second, it connects Chinese influence, as reflected in Google Trends search results, to financial markets, including stock markets, government bond markets and foreign exchange markets. Weekly data for January 2016–December 2019 are entered into an exponential generalised autoregressive conditional heteroskedastic model. The study finds that the effects of concerns over Chinese influence relate mainly to increased volatility of stock market indices and government bond yields, and downward pressure on the share prices of individual firms that are heavily exposed to Chinese markets. However, the overall effects appear to be minor or insignificant. The implications of these results are that China’s economic coercion (if any) may not be effective, and Australia’s responses to Chinese influence and interference (if any) may generate insignificant costs. Finally, this study makes original and significant academic contributions to academia by providing a novel framework for exploring international relations.

Dynamic correlations in bond markets between US and emerging countries

ABSTRACT We adopt the wavelet method to provide better measures of the dynamic correlations between the US and major emerging government bond yields, revealing the structural changes from a three-dimensional analysis. The study concludes two wavelet-based empirical results. First, there are significant positive correlations between the underlying three country pairs of government bonds, exhibiting the synchronicity in time-frequency basis. Second, US government bonds lead every emerging country government bond over the time scales. It shows that US government bonds, on behalf of the developed government bond markets, have an important role in leading and guiding emerging government bonds. The findings remind international investors of the reduced benefits of diversification on global bond investment portfolios and paying greater attention to the influences of US government bond market when managing investment portfolios.