Local Bond Market Research Articles

WITHDRAWN: the Impact of Monetary Policy on the Liquidity of Bond Market——Based on Chinese Local Government Bond Market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.

Fiscal self‐sufficiency, debt policy, and long‐term sustainability in China's emerging local bond market

AbstractUsing panel data from 155 Chinese provincial‐level governments between 2015 and 2020, this study develops fiscal indicators to measure the sustainability of China's bond market given its institutional context. With these indicators, the research empirically explores the effect of fiscal institutions such as centrally‐imposed debt limits on local governments' debt sustainability. It also investigates the capacity of local governments for self‐sufficiency to meet their debt obligations and maintain long‐term sustainability. We find that debt limits have promoted local debt sustainability while local fiscal self‐sufficiency has had little effect on debt sustainability in the long‐term. The findings provide public finance and policy scholars with an understanding of the effectiveness of fiscal institutions such as debt limits imposed by China's central government.

Do foreign investors affect the volatility of local currency bond prices? Empirical evidence from China

How does the participation of foreign investors on local bond markets impact the volatility of bond prices and yields? An answer to this question is important for policy makers from emerging markets in their attempts to liberalize access to financial markets. However, empirical literature gives inconclusive answers to this question. Reasons are that studies analyze diverse types of bonds and apply their analyses to different samples of countries and for different phases in the opening up of markets. We add to existing knowledge by empirically investigating the impact of foreign investors' participation on the volatility of prices of two types of Chinese bonds, government bonds and policy bank bonds, as well as for three stages in the liberalization of the Chinese bond market. We find that foreign investors' participation does not exert significant effects on volatility until late in the opening of the bond market. In addition, we uncover that those bonds which are more influenced by government policies, policy bank bonds, are also more strongly affected by international capital flows. From a policy perspective, our results emphasize the importance of increasing the openness of China's local currency bond market, of stabilizing foreign investors' expectations and, in turn, international capital flows.

The impact of EPU spillovers on the bond market volatility: Global evidence

This paper studies the effect of economic policy uncertainty (EPU) spillovers from other countries on local bond market volatility. Using multivariate quantile model (White et al., 2015), we develop a country-specific EPU spillover measure for 23 economies from 2003 to 2019. We find that EPU spillovers have a significantly positive effect on local bond market volatility. This effect becomes stronger if the spillovers are from developed markets and when the spillovers are measured during financial crises. Recognizing the relation between EPU spillovers and bond volatility can motivate policy makers to closely monitor foreign EPU and take actions to alleviate the detrimental influence when foreign EPU rises.

Member States Sovereign Green Bond Issuance and the Development of Local Green Bond Markets in the EU

Member States Sovereign Green Bond Issuance and the Development of Local Green Bond Markets in the EU

Does credit rating agency reputation matter in China's local government bond market?

All issuers in China's local government bond market, which is nascent but growing rapidly, have the same AAA ratings. However, we provide evidence that the credit rating agency's reputation can certify differences in ratings' reliability and further impact bond pricing. On the basis of a sample of 7941 local government bonds issued from 2015 to 2021, results show that risk premium is significantly low for bonds rated by prestigious credit rating agencies, which means that issuers can save borrowing costs. Moreover, local governments regarded as less transparent in fiscal information disclosure enjoy more cost savings for their bonds by hiring more reputable agencies. Regression results are affirmed with the Heckman two-stage model, difference-in-differences regression, and machine learning method to solve the potential endogeneity issue. This paper's findings contribute to the debate on the credit rating agency's reputation hypothesis and present three implications. First, investors can rely on the credit rating agency's reputation to complement credit risk analysis. Second, local government policymakers should implement appropriate policies to reduce debt costs and improve public finance sustainability. Lastly, regulators should considerably focus on the supervision of credit rating agencies, given their substantial impact on bond pricing and the market's information asymmetry.

How foreign participation in the Colombian local public debt market has influenced domestic financial conditions

Since 2014, participation of foreign investors in the Colombian local public bond market has increased substantially. One of the factors that has driven this result is the increased weight of Colombia in JP Morgan´s Government Bond Index. Some evidence suggests that the resulting inflows have reduced bond and loan interest rates and raised the loan supply. There is also evidence of an increased sensitivity of local public bond yields to CDS and EMBI given the inflows, although the influence of external financial conditions on domestic lending rates has remained subdued. Finally, no evidence is found of a shift in the transmission of domestic monetary policy shocks to public bond and lending interest rates after the increase in foreign participation in the local bond market.

Has Local Government Debt Promoted Economic Growth in developing countries? New evidence from a survey in China

Based on the panel smooth transition regression (PSTR) model, this paper empirically analyzes the relationship between Chinese local government’s bond financing and economic growth, with the quarterly panel data of bonds issued by local governments and their investment and financing platform companies in the open market from 2008 to 2018 as samples. The research shows that there is a gradual non-linear relationship between local government bond market financing and economic growth in China. With the increase of the scale of local government bond market financing in China, the effect of bond market financing on economic growth will gradually decline and have a negative effect. This result means that for developing countries like China, it is not advisable to rely solely on government investment to drive economic growth.

Term premium in emerging market sovereign yields: Role of common and country specific factors

This paper provides cross-country analysis of local bond market term premia in emerging countries. In order to investigate the role of domestic and global factors in the determination of compensation demanded by investors for their medium and long term fixed income investments, term premia is computed for emerging countries by using methodology adopted in Adrian et al. (2013). It is found that changes in market liquidity conditions is important for the variation in term premia. Moreover, movements in domestic and global factors are closely linked to term premia. In this regard, uncertainty related economic surprise indicator and exchange rate related expectations subsume some part of the expected excess returns in both medium and long term. Among other explanatory variables, inflation uncertainty is the only variable found to be insignificant in medium term, albeit it has an explaining power in the long term.

Alternative Financing Instruments for African Economies

This paper investigates the alternative financing instruments that can be used to hedge sovereign risks and finance development in African countries. Many heavily indebted countries are exposed to external risks especially the exchange rate shocks due to limited use of hedging instruments. We propose alternative financing instruments to minimize sovereign risks and the cost of debt. Our paper uses the standard model for pricing options, the Black-Scholes model to determine the fair value of options. The findings show that barrier options have an added advantage over plain vanilla options because of its knock-ins and knock-outs features hence they are the most affordable to use. An important aspect of the effective debt management policies should be on developing local bond market to access alternative financing instruments in the world capital market.

Local Government Bonds, Land Finance and Systematic Financial Risk

Local government debt plays an important role in promoting economic development, but with the continuous expansion of the scale of local government debt, coupled with the opacity of financial and debt information, local debt risk may be directly transformed into financial risk. Therefore, the potential mechanism of local government debt risk inducing systemic financial risk is studied to strictly control local government debt and prevent it at present. It is of great practical significance to mitigate systemic financial risk. At present, the research on local government debt mainly focuses on the mechanism of local government debt to amplify economic fluctuations, while the potential mechanism of local government debt risk to induce systemic financial risk is relatively few. From the perspective of local government bonds and land finance, the innovation of this paper is to depict the Chinese elements such as the maturity of local government bonds, the opacity of debt and financial information, and to integrate local government debt, land finance and financial intermediaries into the framework of general equilibrium to analyze the potential mechanism of systemic financial risk induced by local debt risk. This study finds that when the economy is facing negative productivity shocks, the decline in total output will inhibit the land demand of households and enterprises, and the decline in land prices caused by the decline in demand will reduce the land-related fiscal revenue of local governments. On the one hand, the decline of land-related fiscal revenue will reduce government expenditure; on the other hand, it will increase the pressure on local governments to repay debt and the risk of debt, which will lead to the rise of bond interest rates and the decline of bond prices. Lower bond prices will affect the balance sheet of financial intermediaries, resulting in increased leverage and risk premium of financial intermediaries. Under the balance sheet constraints, financial intermediaries will shrink corporate credit, resulting in an increase in systemic financial risk. Rising interest rates and tightening credit will restrain enterprises’ investment and land demand, further reduce total output and land prices, increase the debt risk of local governments, and form a financial accelerator mechanism in the economy, which will lead to the mutual reinforcement of the debt risk and financial risk of local governments and form a vicious circle. In addition, when financial risk rises, the default risk of local government debt is lower. Based on the trade-off between risk and return, financial intermediaries will hold more local government bonds. Credit squeeze brought by asset allocation changes will further strengthen the financial accelerator mechanism and strengthen the interaction between debt risk and financial risk. Meanwhile, although extending the bond maturity can reduce the pressure of local governments to repay their debt in the short term, the longer the bond maturity is, the greater the financial shock and economic volatility caused by local government debt risk are. The paper indicates that: for resolving local government debt risk and reducing the probability of systemic risk, we firstly need to improve the local government bond market, diversify local government bond investors, and change the current situation dominated by commercial banks; secondly, we should strengthen budget constraints and control the scale of local government debt; thirdly, we should rationally design the maturity structure of local government bonds, strengthen the transparency of local government finance and debt information, and play the role of market constraints; finally, when financial risk rises, the central bank can adopt non-traditional monetary policy to intervene in the market, which can reduce financial risk and social welfare losses.

Local religious beliefs and municipal bond market outcomes

AbstractThis study investigates whether religion‐induced risk aversion affects municipal bond market outcomes from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with a high Catholic‐to‐Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits, and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Furthermore, the effects persist when I use an alternate specification that controls for omitted factors that are time invariant. Overall, my evidence suggests that a bond issuer's religion‐induced risk aversion plays a significant role in the pricing of local government bonds.

INNOVATIONS IN THE SUSTAINABLE MANAGEMENT OF LOCAL GOVERNMENT LIABILITIES IN CHINA

Through the first and second year of China’s 13th five-year plan coincided with local governments holding their own “Two Sessions” before attending the “Two Congresses” in Beijing in March. As one of the frequent results, the issue of local government debt naturally became a popular topic. The scale of local government debt in China was/is considerable, and the structure is complex, which poses a threat to sustained economic development. To address this situation, China must regulate local government debt, clean up urban financing vehicle debt, foster and manage the local bond market, and introduce innovation in the management of local government liability. Only through initiatives such as this will China gain control of local government debt and thus support and promote the long-term sustainable growth of the economy.

China's Local Government Bond Market

Local governments play a significant role in China’s public finance and fiscal operations. The size of local government debt has grown rapidly over the past years, exceeding the stock of sovereign debt in China. How does this development compare to other countries and what policies can foster the sound development of the bond markets? This paper finds that despite its rapid growth, the local government bond market is still underdeveloped. Severe impediments—low liquidity, weak credit discipline, structural fiscal deficit in local governments—have become more visible. Reforms to develop a sound local government bond market should harmonize tax and regulations, build liquidity, and advance fiscal reforms to tighten off-budget borrowing and address intergovernmental imbalances.

China's Local Government Bond Market

Local governments play a significant role in China’s public finance and fiscal operations. The size of local government debt has grown rapidly over the past years, exceeding the stock of sovereign debt in China. How does this development compare to other countries and what policies can foster the sound development of the bond markets? This paper finds that despite its rapid growth, the local government bond market is still underdeveloped. Severe impediments—low liquidity, weak credit discipline, structural fiscal deficit in local governments—have become more visible. Reforms to develop a sound local government bond market should harmonize tax and regulations, build liquidity, and advance fiscal reforms to tighten off-budget borrowing and address intergovernmental imbalances.

India and China Debt Market Structure; Opportunities and Challenges

Bond markets are better indicators of the investment climate than equity markets and tend to react much faster. Global emerging local currency Bond markets have grown rapidly from US$ 1.4 trillion in 2000 to US$ 8.1 trillion in 2011.Debt Capital Market (DCM) development is a widely-discussed topic in Indian financial and political circles today. The share of emerging market has increased from 4.8 per cent in 2000 to 11.7 per cent in June 2011. The size of East Asian bond markets (EABM) was US$ 5 trillion and contributes 61 per cent of global total. If India is included, the share increased to 70 per cent. China is the largest market worth of US$3.1 trillion, which comprising of 38.5 percent of the top ten emerging bond market followed by Brazil (18.9%) and South Korea (15.1%). India holds fourth position in the emerging bond market. China has established the local government bond market is to finance their massive infrastructure projects. Current revenues and central government grants are insufficient. Current revenues and central government grants are insufficient. China’s globally unprecedented rapid pace of urbanization from 23 per cent in 1989 to 52 per cent in 2012 has created a massive demand for infrastructure in its cities, including roads, mass transit, water, sewerage, schools and hospitals. An urbanization rate of 66 per cent is anticipated by 2030. Both corporate and government get funded by debt market and helps the smaller borrowers to get tap bank lending which are squeezed by the large corporate. In this paper the debt market structure of India and China, scope for taping the excess liquidity through debt instrument, development of state and industry, opportunities and challenges ahead are discussed.

Exploring the Role of Foreign Investors in Russia's Local Currency Government Bond (OFZ) Market

Local currency government bonds (OFZ bonds) are an important fixed-income instrument in Russia's financial markets. In this paper, based on granular data, we explore the development of the OFZ bond market with a focus on foreign investors. As this fixed-income market has experienced a liberalization of the domestic trading and settlement infrastructure, and weathered several episodes of market stresses since the 2008-09 global financial crisis, the role of foreign investors can be observed along with these events. What we have found is that foreign investors had influenced the market before they became an important player and since then they have contributed to the development of the market while not necessarily destabilizing it in episodes of shocks.

Exploring the Role of Foreign Investors in Russia's Local Currency Government Bond (OFZ) Market

Local currency government bonds (OFZ bonds) are an important fixed-income instrument in Russia’s financial markets. In this paper, based on granular data, we explore the development of the OFZ bond market with a focus on foreign investors. As this fixed-income market has experienced a liberalization of the domestic trading and settlement infrastructure, and weathered several episodes of market stresses since the 2008–09 global financial crisis, the role of foreign investors can be observed along with these events. What we have found is that foreign investors had influenced the market before they became an important player and since then they have contributed to the development of the market while not necessarily destabilizing it in episodes of shocks.

Do Indonesian firms practice target capital structure? A dynamic approach

Purpose This study aims to investigate the dynamic aspects in the capital structure decisions of firms in Indonesia, offering an extension to the existing literature on Indonesia via a dynamic model, including the existence of target capital structure, the influencing factors, the speed of adjustments and the supporting theories to explain the findings. Design/methodology/approach This study uses a dynamic partial adjustment model estimated based on a generalized method of moments. Findings Indonesian firms do practice target capital structure and are influenced by firm-specific factors like profitability, business risk, firm size, liquidity and share price performance due to time-varying factors. A rapid adjustment toward target leverage is detected, thus supporting the existence of the dynamic trade-off theory (TOT). The pecking order theory (POT) also has significant influence, particularly after the new reformation of financing policy, where retained earnings are also preferred as a source of financing apart from merely external financing through bank loans. There are also traces of market timing influences where firms also seem to time their equity issuance. Research limitations/implications Despite relatively utilizing recent data and bigger sample firms compared to the previous limited studies on Indonesia, the results of this study, however, need to be cautiously interpreted. First, the sample chosen focused on listed firms, hence may not be generalized to all Indonesian firms, listed and unlisted. Second, the study does not separate firms by sectors and their leverage positions, that is under-levered and over-levered, so as to note that financial decisions may also be affected by the sector in which the firms operate and their leverage positions. These are to be considered in future research. Practical implications There is strong evidence that the corporate financing behavior of Indonesian firms is governed by the POT and TOT. Both are dealing with the function of debt. The financial sector reformation does have a positive impact on the banking sector, but not the local corporate bond market. Therefore, regulators and policymakers should bear in mind that banking as well as private bond market in Indonesia must be tailored in such a way that both could act as intermediaries of debt financing, as bond market represents an important component of a diversified financial sector. Originality/value This study fills the gap by providing an extension to the existing literature and a deeper insight of the capital structure of Indonesian firms using a more robust dynamic model.

The predictability of excess returns in the emerging bond markets

This study examines the relationships that exist between excess bond returns and global and country-specific factors, focusing on a sample of 12 developing countries. Our results show a significantly negative autocorrelation with regard to the excess returns of bonds in the emerging markets; with growth in the size of the local bond market, there is a corresponding increase in the excess bond returns. For most of the developing economies, with an increase in emerging market bond returns, there are discernible reductions in the level of domestic interest rate and increases in the volatility of bond returns. A higher sovereign bond spread predicts higher excess returns for emerging market bonds. Overall, we find that world factors have relatively less predictive power in the emerging market bonds.