Bond Investors Research Articles

When Do Corporate Bond Investors Earn a Premium for Bearing Risk? A Test Spanning the Great Depression of the 1930s

For many years the Stocks, Bonds, Bills & Inflation yearbook has served as the primary source for calibrating historical asset returns. However, uneasiness has grown about its depiction of corporate bond returns prior to the second World War. I document problems with the source data used in the SBBI and replace its flawed dataset with new observations of bond prices from 1926 to 1946 for a sample of several hundred large bonds listed on the NYSE and rated investment-grade. I find that the SBBI overstates corporate bond returns in the 1930s and accordingly, gives an unreliable estimate of the premium received for owning investment grade corporate bonds rather than government bonds during the prewar years. To extend the analysis I collected additional bond price data from 1946 to 1974 and find that the SBBI also overstates corporate bond returns in the 1960s. The problem again stems from a reliance on flawed yield series in place of observing bond prices. I combine the new data with existing data to examine the corporate bond premium from 1909 through 2019. Using ten-year rolling returns, over the past century I find the average premium earned on long maturity corporate bonds to be small, about 15 basis points annualized. For many of the ten-year rolls, the premium was instead a deficit: a bond investor would have done better owning only long government bonds. The small and fitful premium contrasts with the yield spread on investment-grade bonds, which was always positive and substantial throughout the period. Because the premium has been much more variable, the relative size of the yield spread does not seem to be predictive of whether a premium will subsequently be earned and how much. Results are interpreted in terms of the importance of regime change in financial history: sometimes corporate bonds outperform government bonds, sometimes they do not, just as sometimes stocks outperform bonds, and sometimes they do not, contra Siegel (2014). The idea of regime change challenges the notion that a mean computed over a longer rather than a shorter interval contributes any additional predictive power to the study of asset returns over human horizons.

COLUMBIA BUSINESS SCHOOL ROUNDTABLE ON Broken Models of Public Finance

Joe Biden's chief economic adviser joins a proactive investor who was one of the largest private investors in Greek government bonds in dispelling a number of widespread misconceptions about public finance and sovereign debt, with particular focus on the inadequacies of the conventional measures used by politicians, the media, and even many economists when assessing the financial performance and condition of national governments. After describing the limitations of the “traditional debt and deficit model,” Paul B. Kazarian proposes the use of an alternative called Public Financial Management, or “PFM,” that has been implemented in New Zealand, the U.K. and 12 other countries. Such a model aims to provide a general government total balance sheet (federal, state, and local governments) that reflects all government assets and liabilities. And when using PFM, one finds, for example, that New Zealand is consistently ranked first or second in the world on Government Total Net Worth as percentage of GDP and Citizens' Wealth (CW1), whereas the U.S. falls well below the top tier.Jared Bernstein, on the other hand, is much less concerned by the understatement of U.S. debt and other liabilities than by the failure of conventionally reported U.S. debt and spending statistics to distinguish between “good” and “bad” debt, and between positive‐ and negative‐NPV public expenditures. While conceding that U.S. unfunded liabilities “sound very scary,” Bernstein points out that financial markets seem relatively unconcerned, if only because these future costs and liabilities are estimated on the basis of current law and practices, and sovereign governments, to a far greater extent than private corporations, have the power to limit liabilities or increase projected revenues just by reducing benefits or imposing or raising taxes.

Corporate bonds, exchange rates and memorandum: Evidence from Greece and Ireland

AbstractIn this article, we examine the success rate of the memorandum in two peripheral eurozone countries (Ireland and Greece) that had significant differences in organisational structures and their development models. For this reason, we measure the quantile dependence between the returns of corporate bond investors and exchange rates employing a novel econometric methodology, the cross‐quantilogram. In Ireland, our key findings exhibit a higher rate of absorbing of structural reforms which contributes to more steady reinforcement of the enterprises, whether the European economy is stronger than the US or not. In contrast, Greece where the structural reforms are more intense, show a similar picture over a period longer than that of Ireland and only when the European economy goes beyond the US economy.

THE EFFECT OF BOND CHARACTERISTICS, FINANCIAL PERFORMANCE AND MACRO VARIABLES ON RETURN OF CORPORATE BOND IN THE AGRIBUSINESS SECTOR

There are several reasons why companies choose to issue bonds rather than borrowing from banks. Interest paid by companies to bond investors is often lower than the interest rate charged by the bank, but still at least bond issuance from the agricultural sub-sector and chooses to lend to the bank. The purpose of this study is to analyze the influence of bond characteristics, financial performance and macroeconomic return on corporate bonds in the agribusiness sector. This study uses a panel data regression method consisting of 12 bonds with the vulnerable time between 2014-2015 \quarterly. Based on the panel data model shows that the characteristics of bonds (yield to maturity, coupon, rank, and duration), financial performance (CFOS) and macroeconomics (IHSG) have a significant effect on the return of bonds. The Company should consider the amount of bond yield and coupon to be issued and pay attention to financial performance, especially cash flow and capital expenditure (capital expenditure). Keywords: agribusiness sector, bonds, characteristics, performance, macroeconomics

Do Bond Investors Price Tail Risk Exposures of Financial Institutions?

We analyze whether bond investors price tail risk exposures of financial institutions using a comprehensive sample of bond issuances by U.S. financial institutions. Although primary bond yield spreads increase with an institution’s own tail risk (expected shortfall), systematic tail risk (marginal expected shortfall) of the institution doesn’t affect its yields. The relationship between yield spreads and tail risk is significantly weaker for depository institutions, large institutions, government-sponsored entities, politically-connected institutions, and in periods following large-scale bailouts of financial institutions. Overall, our results suggest that implicit bailout guarantees of financial institutions can exacerbate moral hazard in bond markets and weaken market discipline.

From Implicit to Explicit: The Impact of Disclosure Requirements on Hidden Transaction Costs

ABSTRACTThis paper provides evidence that disclosing corporate bond investors' transaction costs (markups) affects the size of the markups. Until recently, markups were embedded in the reported transaction price and not explicitly disclosed. Without explicit disclosure, investors can estimate their markups using executed transaction prices. However, estimating markups imposes information processing costs on investors, potentially creating information asymmetry between unsophisticated investors and bond‐market professionals. We explore changes in markups after bond‐market professionals were required to explicitly disclose the markup on certain retail trade confirmations. We find that markups decline for trades that are subject to the disclosure requirement relative to those that are not. The findings are pronounced when constraints on investors' information processing capacity limit their ability to be informed about their markups without explicit disclosure.

THE INFLUENCE OF CAPITAL STRUCTURE, DIVIDEND PAY OUT ON FIRM VALUE AND FIRM PERFORMANCE : EVIDENCE FROM INDONESIA STOCK EXCHANGE

The purpose of this study is to test empirically the effect of leverage, investment stock, bond, and dividend policy on firm value and firm performance for agriculture, basic chemical industry, consumer goods, and finance on the Indonesian stock exchange. The population of this study is 632 companies listed on the Indonesian stock exchange, with a sample of 236 companies in 2018-2019, secondary data sources from ICDM, and audited financial reports by collecting documentation data and processing data with moderate multiple linear regression. The findings of the research are that financial policy proxied by leverage, investment in stocks and bonds shows a significant positive effect on firm performance, and dividend policy also shows a significant positive effect on firm value. To increase the generalizability of research results, future studies will collect data with different populations or different countries. This study contributes to the performance and value of the company where the increase in leverage, investment, bonds, and dividends will increase the performance and value of the company. The implication of this research is to improve the performance and value of the company for the better. This research is limited to capital structure, dividend policy on firm value with firm performance as moderation. Further research can be developed with different samples and more for generalizations.

Macro-Factors of Credit Spreads in Corporate Bonds

This study emphasizes on analysis of the macro factors of the credit spreads (CS) of the fixed-rate corporate bonds of non-financial enterprises.Firstly, industry growth (IG) has a significant negative impact on CSs. IG reflects the prosperity of the real economy. The increase of investment demand promotes the rise of bond prices and narrows the CSs; Secondly, consumer price index (CPI) has a significant positive impact on CS. On the one hand, the increase of inflation will reduce bond investment demand, on the other hand, it will increase investors' expectations of future tightening monetary policy. Uncertainty increases while default risk rises and CS widen. Thirdly, spreads of treasuries have a significant negative impact on CS. When the slope of the treasury yield curve increases and the expectation of interest rate increases, macro-economy is in an upward stage, and CS narrow. Fourthly, the analysis of VAR, variance decomposition and impulse response function show that the impact of CPI, IG and interest rate difference of national debt on spreads has time lag. While money supply affects CS by affecting CPI. This study discusses the CS which is very important for the asset allocations of investors. The investors and market participants should consider the macro-factors while invest in corporate bonds.

Foreign Portfolio Investment And Human Capital Development In Nigeria 2005-2019

Following the saving – investment gap resulting from shortfalls of savings suffered by developing economies it has become fashionable to embrace foreign capital inflow as an essential complementing alternative supply of funds for domestic investment. This study investigates the effect of foreign portfolio investment on human capital development in Nigeria covering the period 2005-2019. Foreign portfolio investment, the explanatory variable is disaggregated intoforeign portfolio equity (FPIE) and foreign portfolio bonds (FPIB), while exchange rate is included as the control variable. The Human Capital Development – the dependent variable is represented by the Human Development Index (HDI). Econometric techniques,including Descriptive Statistics,Augmented Dickey Fuller tests for unit roots, Error Correction Model (ECM), and Ordinary Least Square (OLS) Regression analysis were used. The study showed foreign portfolio investment in equity has positive and significant effect on human capital development while foreign portfolio investment in bonds has positive but insignificant effect. The study thus concluded that foreign portfolio investment has positive effect on human capital development and has helped to improve human capacity necessary for economic development in Nigeria. The study reiterated the need for eye-catching polices that will attract greater foreign portfolio investment in both equity and bonds in the stock market which could be achieved by greater openness.

Unexpected Returns on Bonds. The Case of the Pandemic Period in Poland

Changes in the term structure of interest rates unknown a priori to investors induce unanticipated rates of return on all financial instruments, especially on bonds and bond portfolios. Unexpected returns on bond investments arise particularly often in economic downturns. During the COVID-19 pandemic period in Poland interest rates have been substantially reduced by Central Bank. Within three months, the WIBOR 1Y rate fell from 1.84% (February 27, 2020) to 0.3% (June 4, 2020). The consequences of the Central Bank decision have been crucial for investors. A one-time increase (decrease) in rates decreases (increases) the market value of assets. The literature offers some mathematical tools to investigate this problem. The aim of this study is to assess and analyse the influence of a considerable decline in spot rates on unexpected profits on Treasury bonds to support investors decisions and emphasize practical aspects of bond risk measurement. It is important to note that after the quite long time period of almost flat interest rate structure in Poland, the topic regarding bond risk caused by changes in interest rates has become significant again.

From Implicit to Explicit: The Consequences of Fee Disclosure

This paper provides evidence that disclosing corporate bond investors' transaction costs (markups) affects the size of the markups. Until recently, markups were embedded in the reported transaction price and not explicitly disclosed. Without explicit disclosure, investors can estimate their markups using executed transaction prices. However, estimating markups imposes information processing costs on investors, potentially creating information asymmetry between unsophisticated investors and bond-market professionals. We explore changes in markups after bond-market professionals were required to explicitly disclose the markup on certain retail trade confirmations. We find that markups decline for trades that are subject to the disclosure requirement relative to those that are not. The findings are pronounced when constraints on investors' information processing capacity limit their ability to be informed about their markups without explicit disclosure.

Securities Lending and Corporate Financing: Evidence from Bond Issuance

The securities lending market allows institutional investors, such as insurance companies, to lend out asset holdings in exchange for cash collateral, an important but understudied source of funding. Since securities lenders are also primary investors in corporate bonds, we hypothesize that their lending preference for certain types of bonds can influence corporate financing policies. Indeed, we observe that a higher lender preference for long-term bonds stimulates firms to issue more such bonds and helps boost bond prices. The analysis exploiting a quasi-experiment supports a causal interpretation. Our results shed new light on the potential impact of securities lending.

The Intention to Invest in Retail Bonds in Indonesia

The low rate of investment in retail bonds among state-owned enterprise employees is worrying because this product is aimed at this type of customer. The theory of planned behaviour explains the possible reason(s) why the employee is reluctant to invest in retail bonds. This study sheds light by adding the product involvement variable to the original model to identify the intention to spend and what the factors are those are influencing it. As predicted, attitude and subjective norm are positively related to the intention to invest in retail bonds. Based on the results of data processing, it was found that the attitude and subjective norm variables are factors that positively and significantly affect the intentions of ORI investment by IDX employees. Also, the results of data processing showed that intention had a significant effect on the investment behaviour of ORI by IDX employees. This study is limited to discussing the intentions of ORI investment by IDX employees, making it possible for other researchers to examine different variables.

Does Distribution Growth Affect the Insurers' Asset Allocation in Life Insurance? The Case of Central Europe

This paper deals with the effects of distribution stress and macroeconomic factors on the composition of life insurance investment portfolios on the Central European market. Using a wide array of variables and the VAR model as our main method, we have found that a strong majority of insurers react to external shocks, induced by high levels of contract turnover or positive changes in macro-variables such as GDP and inflation, by strengthening bond components of their portfolio. The exception is connected to interest rates (two-week repo), which presumably have a negative effect on bond investments. Other components such as shares, funds and cash positions have been affected in a diverse way, yet to a minor extent. This implies that insurers tend to react to external stressors by beefing up the conservative part of their investments, potentially leading to an underperformance of managed assets. As such, our results point to conceivable regulatory implications, which would prevent those secondary negative detriments of life distribution growth (i.e., reselling), which are to be expected on the surveyed market.

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.

The reinvestment risk premium in the valuation of British and Russian government bonds

This article studies the dynamic properties of the reinvestment risk premium in the UK and RF government bond markets. In a new interest rate environment when sovereign debt trades at a low and even negative yields and bond funds are struggling to earn sufficient returns, bond investors have become increasingly wary of reinvestment risk largely neglected previously. The reinvestment risk premium is quantified on the basis of replicating portfolios and further analyzed with respect to exposure to exogenous influence with the help of cointegration techniques. The findings are that in both markets investors recognize the significance of reinvestment risk. However, there are differences in the sensitivity of the reinvestment risk premium to exogenous indicators. In the UK government bond market investors tend to be guided by more conservative indicators but are ready to forecast in the medium-run; in the RF government bond market investors tend to be guided by less conservative indicators but are ready to forecast only in the short-run.

Real Estate Returns

This article compares and contrasts investments in residential, farmland, and commercial real estate. We also compare real estate investments to more traditional investments in stocks, bonds, commodities, and alternative assets. Price-change returns, rental returns, and total returns from 1991 through 2018 are the focus of the analysis. Including rent is important because rent makes up a significant part of the returns. We include empirically derived implicit net rent data from owner-occupied residences and owner-occupied farmland in the analysis. <b>TOPICS:</b>Real estate, performance measurement <b>Key Findings</b> • High Returns. All three real estate categories did well. But farm real estate had the highest average returns, and the average farm price did not dip during the 2008–2009 subprime mortgage crisis. • Riskiest. Commercial real estate was the riskiest category of real estate investment between 2003 and 2019. And it suffered the largest price dip during the subprime mortgage crisis. • Resolving Uncertainty. Because real estate is relatively illiquid, it is difficult to measure the year to year returns precisely. However, our overall returns from rent and price changes are more informative.

Equity investor sentiment and bond market reaction: Test of overinvestment and capital flow hypotheses

In this paper, I examine the effect of equity investor sentiment on the bond market. Sentiment can affect bond returns via two channels. First, in times of high investor sentiment, overvalued equity can lead to firm overinvestment, resulting in a negative impact on bond pricing due to an increase in default risk. Second, overvalued equity attracts capital flow to the equity market from the bond market, which can create a downward pressure on bond pricing. Consistent with these channels, I find that equity investor sentiment exhibits a significant negative relation with contemporaneous bond returns. This effect is stronger for firms that overinvest. Furthermore, I find a positive relation between sentiment and subsequent bond returns, consistent with a return reversal predicted by the capital flow channel (due to the backflow of capital); however, there is no return reversal observed for overinvestment firms. Additionally, I find a negative (but delayed) impact of equity investor sentiment on bond ratings for overinvestment firms, consistent with an increase in default risk of these firms. Overall, my study highlights that the bond market reacts to equity investor sentiment in a rational way, consistent with bond investors’ payoff function.

Carry Strategies and the US Dollar Risk of US and Global Bonds

In this article, the authors investigate the ability of currency carry strategies to mitigate the US-dollar risk of US and global bond benchmark indices. Using the Fama-French and currency factors, the authors analyze the bond benchmarks and find that currency carry strategies can easily be modified to suit bond investors, portfolio managers, and allocators. A central finding of the authors is that currency carry strategies help to mitigate the currency risk of the US dollar. Specifically, broad indices (including credit and government exposure) deserve modified carry strategies to mitigate the impact on the US dollar The results show that the exposure to the equity-based profitability factor—one of the factors in the Fama-French five-factor model—is to some extent a natural hedge against the US-dollar risk of high-yield and corporate indices. Moreover, combined currency carry overlay strategies and fixed-income investments generate Probabilistic Sharpe ratios above a certain threshold level. The results suggest that investors should consider modified currency carry strategies rather than simple carry rules when managing both US and global-high yield, corporate, and government debt. The authors also provide a framework that can be used to diversify the impact of individual equity-based factors and the currency style factors on fixed-income benchmarks. TOPICS:Analysis of individual factors/risk premia, factor-based models, style investing Key Findings • Carry strategies seek to reduce the US-dollar risk and improve the risk-return profile of US domestic and global fixed-income investments. The carry strategies can easily be implemented and monitored by portfolio managers and allocators desiring to control for their US-dollar risk. • Fixed-income adjusted currency carry strategies produce better results than the simple carry strategy as measured by the Probabilistic Sharpe ratio. Investors can utilize currency carry and manage the currency risk of corporate and high-yield US and global bond benchmarks. • Currency carry strategies generate diversified factor exposure to the Fama-French factors by mitigating the US-dollar risk and increasing alternative factor exposure.

A synthetic model for asset-liability management in life insurance, and analysis of the SCR with the standard formula

The aim of this paper is to introduce a synthetic ALM model that catches the key features of life insurance contracts. First, it keeps track of both market and book values to apply the regulatory profit sharing rule. Second, it introduces a determination of the crediting rate to policyholders that is close to practice and is a trade-off between the regulatory rate, a competitor rate and the available profits. Third, it considers an investment in bonds that enables to match a part of the cash outflow due to surrenders, while avoiding to store the trading history. We use this model to evaluate the Solvency Capital Requirement (SCR) with the standard formula, and show that the choice of the interest rate model is important to get a meaningful model after the regulatory shocks on the interest rate. We discuss the different values of the SCR modules first in a framework with moderate interest rates using the shocks of the present legislation, and then we consider a low interest framework with the latest recommendation of the EIOPA on the shocks. In both cases, we illustrate the importance of matching cash-flows and its impact on the SCR.