Long-term Government Bond Yields Research Articles

경제정책 불확실성이 장단기 국채 수익률에 미치는 영향 분석

This study analyzes the impact of Korean and foreign economic policy uncertainty on Korean short-term and long-term government bond yield. First of all, the effect of domestic economic policy uncertainty on short-term and long-term government bond yields was analyzed, and then relative policy uncertainty, which was constructed as a ratio of Korean economic policy uncertainty to foreign economic policy uncertainty, was used. Japan, China, and the United States were considered for foreign economic policy uncertainty. In addition, through principal component analysis, Korea's economic policy uncertainty was divided into Korea-specific factors and common factors with Japan, China and USA. The analysis results are as follows. First, Korea's economic policy uncertainty did not have a significant effect on long-term and short-term government bond yields. Second, Korea's unique factor in economic policy uncertainty was found to significantly increase short-term government bond yields. Third, the economic policy uncertainties of Japan, China, and the US have been shown to increase Korea's short-term government bond yields. Fourth, in case of analyzing the effect of relative economic policy uncertainty, Korea's short-term government bond yield rises when Korea's economic policy uncertainty is relatively greater than China's. This implies that the impact of uncertainty on government bond yields can be clearly understood only when economic policy uncertainty is distinguished as a country-specific factor and a common factor.

The ECB’s Unconventional Monetary Policy Effects on the Economies of Bulgaria and Ireland

This paper analyzes the impact of the ECB’s euro short-term interest rate – the Euro overnight index average (EONIA) – on the long-term government bond yields in one economy in the non-euro area (Bulgaria) and one economy in the euro area (Ireland) through the interest rate transmission channel. The paper’s main contention is that the ECB’s non-standard monetary policy directly affects the euro area member states, such as Ireland. At the same time, its impact on the changes in the interest rates in Bulgaria is indirect. The result from the econometric modeling demonstrates that if EONIA rises by 0.1 percentage point, the yields on the long-term government bonds in Ireland and Bulgaria will increase, respectively, by 0.175 and 0.123 percentage points. Given fixed levels of EONIA each month, the interest rates on the 10-year government bonds in Ireland and Bulgaria are expected to decline, respectively, by 0.006 and 0.036 percentage points. The large-scale bond-buying programmes and the negative deposit rates have driven significant increases in negative-yielding debt in the euro area, including in Ireland. In contrast, Bulgaria’s long-term government bond yield is positive but dropped significantly during the reviewed period (January 2012 to December 2020).

Value relevance of general government national accounts with ESA2010 accrual accounting framework. Association of ESA2010 reporting quality with decision making and accounting standardisation

Purpose: The necessity for a reliable set of international standards for the compilation of national accounts introduced the accrual accounting framework of the European System of Accounts (ESA 2010). Extensive efforts are made for convergence between Government Accounts (GA) and National Accounts (NA) under accounting standards. Design/methodology/approach: This study investigated the quality of governmental NA, in the context of ESA 2010, from 1999 through 2019, using relative value relevance models of long-term government bond yields. Findings: i) The accrual accounting framework ESA2010 generates value relevant (thus qualitative) NA financial reporting in EU member states and the United Kingdom (UK); ii) The financial variables that better interpret bonds’ return, thus governments’ necessity to borrow money, are showcased; iii) The usefulness of the ESA2010 conceptual framework for decision and policy making process considering that the accrual accounting basis fosters the financial reporting quality, is demonstrated; iv) The quality results set the premise for further discussion for the harmonization and alignment process of accounting standardisation with the ESA2010 accrual accounting framework as a resource for policy and decision making. Limitations: The methodology of value relevance models that is employed to assess the governmental statistical reporting quality with the ESA2010 accrual accounting framework is a private sector technique. Originality: This study contributes theoretically as it fosters the quality of accrual accounting basis. It moreover provides an empirical and practical contribution by introducing relative value relevance econometric models that provide stakeholders with reliable information on the financial position and performance of the government. It showcases significant financial variables and coefficients of statistical reporting for each government. With its value relevant results, it supports evidence-based decision making, allows comparisons between EU governments and the UK, and contributes to increased transparency and accountability.

Transmission mechanisms of conventional and unconventional monetary policies in open economies

This paper provides an empirical examination on the transmission mechanisms of conventional and unconventional monetary policies for two non-EMU countries, Switzerland and the United Kingdom, over the period 1990–2017. We investigate the role of stock prices and consumer expectations in the transmission of monetary policy. We propose two distinct structural VAR models. The model for the case of conventional monetary policy covers the pre-2009 period, while the model for the case of unconventional monetary policy covers the post-2009 period. The official bank policy rate and central bank’s reserve assets are used as instruments for conventional and unconventional monetary policy. The analysis reveals that the inclusion of a forward-looking informational variable of near-term development in economic activity and a financial variable such as the stock prices is of key importance for the monetary policy assessment. We provide evidence for the existence of a consumer confidence channel in the transmission of conventional monetary policy. Moreover, the long-term government bond yields, the exchange rate and stock prices have an important role in the transmission of unconventional monetary policy. Our findings indicate that conventional and unconventional monetary policies have short-run expansionary effects in both countries by increasing output, consumption, investment, stock prices and wages, while reducing unemployment.

Not all government budget deficits are created equal: Evidence from advanced economies' sovereign bond markets

We find that bond markets charge significantly higher interest rates for deficits due to higher government current spending than for deficits due to higher government investment. Thus, from a sovereign risk perspective, not all government budget deficits are created equal. To show this, we use a panel regression approach on European Commission data for 31 advanced economies from 1990 onwards. Econometrically, we address potential endogeneity by using forecasts of fiscal variables and by instrumental variable methods. Based on our preferred specifications, a higher deficit solely due to higher government investment would in fact decrease long-term government bond yields. These findings suggest that the policy debate about fiscal sustainability and fiscal rules should, at the very least, distinguish budget deficits that are the result of investment from those that are not.

Bond yield and crude oil prices predictability

Using long-term government bond yield (LTY), corporate bond yields spread (DFY) and Treasury bill rate (TBL) as the proxies, we find bond yield can effectively predict WTI and Brent spot prices. In-sample analysis indicates that bond yield variables have substantial explanatory power on oil returns, and there are significant Granger causality relationships from LTY and DFY to oil returns. In out-of-sample forecast, bond yield variables defeat historical average benchmark as well as the competing predictors from both statistical and economic perspectives. Moreover, the predictive abilities of bond yield variables can be tremendously enhanced with multivariate prediction methods. We prove that the prediction power of bond yield variables partially stems from their abilities on capturing oil market sentiment. Our findings survive a series of robustness checks.

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.

Veto players, market discipline, and structural fiscal consolidations

Based on a sample of 16 Western OECD countries we show that although veto players with heterogeneous political preferences reduce the probability of a structural fiscal consolidation, the effect of veto players declines with greater financial market pressure, which we measure as the spread between the long-term government bond yield and the corresponding yield in a base country (either the United States or Germany). We proxy veto players with heterogeneous political preferences primarily by the political constraints index of Henisz (Econ Polit 12(1):1–31, 2000). Our findings support the view that, as long as government bond yield spreads are sufficiently narrow, financial market pressure exerts a disciplining effect on fiscal policy by counteracting the political deadlock resulting from veto players who obstruct structural fiscal consolidations. The mirror image of our finding is that financial market pressure exerts a more positive impact on the likelihood of a structural fiscal consolidation in political environments characterized by many heterogeneous veto players.

JGBs’ chronically low nominal yields: a VEC approach

ABSTRACT Low short-term interest rates, induced by the Bank of Japan’s (BoJ) accommodative monetary policy, is mainly responsible for keeping long-term Japanese government bonds’ (JGBs) nominal yields exceptionally low for a protracted period. Elevated government debt and deficit ratios do not exert upward pressure on JGBs’ nominal yields. This paper provides an empirical investigation of chronically low nominal yields of JGBs from a Keynesian perspective. It deploys a Vector Error Correction (VEC) approach to model long-term government bond yields.

Monetary Policy Transmission to Russia and Eastern Europe

In this paper, we argue that the ECB’s unconventional monetary policy announcements have generated significant spillover effects in Russia and Eastern Europe. The hypothesis is tested using OLS estimations of event-based regressions on monetary policy event dummies and seven financial variables in eleven East European countries including Russia. Overall, the empirical results associate the ECB’s unconventional policy announcements with the appreciation of East European currencies, rising stock market indices as well as falling long-term government bond yields and lower sovereign CDS spreads in Eastern Europe and Russia. Bilateral integration with the eurozone is a key determinant of the strength of spillovers, with spillovers strongest in non-euro EU countries and weakest in non-EU East European countries. Furthermore, we find differentiated strength of spillovers to Russia compared to other non-EU East European countries, which we attribute to its fixed exchange rate regime. We also argue for the presence of portfolio rebalancing and confidence transmission channels.

The Long-Run Determinants of Indian Government Bond Yields

This paper investigates the long-term determinants of the nominal yields of Indian government bonds (IGBs). It examines whether John Maynard Keynes’ supposition that the short-term interest rate is the key driver of the long-term government bond yield holds over the long run, after controlling for key economic factors. It also appraises if the government fiscal variable has an adverse effect on government bond yields over the long run. The models estimated in this paper show that in India the short-term interest rate is the key driver of the long-term government bond yield over the long run. However, the government debt ratio does not have any discernible adverse effect on IGB yields over the long run. These findings will help policy makers to (i) use information on the current trend of the short-term interest rate and other key macro variables to form their long-term outlook about IGB yields, and (ii) understand the policy implications of the government's fiscal stance.

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

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.

Credit Risk Determinants in the Vulnerable Economies of Europe: Evidence from the Spanish Banking System

Purpose: The purpose of this paper is to investigate the determinants of non-performing loans in the Spanish banking system over the period 1997Q4–2015Q3. This timeframe includes not only the booming period for the Spanish economy but also an extended post-crises interval which is missing from other studies for Spain. Design/methodology/approach: Using quarterly data from the Central Bank of Spain and from the European Central Bank, the paper employs the ARDL approach to cointegration to identify the existence of a long or short-run relationship between NPLs and a set of macroeconomic, bank-related and country-specific indicators. Findings: Findings from the ARDL model indicate that macroeconomic, bank-specific variables and interest rates are important determinants of non-performing loans in the Spanish banking system. Specifically, the real GDP, the Spanish long-term government bond yield, the return on equity, the total credit granted by the Spanish banks and their capital to assets ratio, explain credit risk in Spain both in the short and the long run. Research limitations/implications: Data on the bank-specific variables are for the whole banking industry, and not for individual banks. If such data were available, a comparison of the credit risk determinants between small/ big banks, private/public or domestic/foreign could be possibly made. Originality/value: These findings provide useful evidence to bank managers and policymakers in dealing with loans' defaults in Spain and in undertaking crucial reforms to stabilize the economy.

The Price Relevance of Fiscal Developments

ABSTRACTWe use Seemingly Unrelated Regressions Estimation methods to assess the link between prices, bond yields and the fiscal behavior. A first equation determines the country-specific cost of government financing via the long-term government bond yield, as a function of budget balance positions. A second equation links the price level to the cost of government financing. Our results for 15 EU countries in the period 1980Q1–2013Q4 show that improvements in the fiscal stance lead to persistent falls in sovereign yields; higher sovereign yields are reflected in upward price movements; improvements in the fiscal stance in recession times lead to short-term decreases in yields and better fiscal stance in expansions induce downward movement in bond yields only after 8 quarters.

The ‘Visible Hand’ of the ECB’s first quantitative easing

Quantitative easing a la ECB has produced significant impact on long-term nominal rates through ex ante channels, such as signalling channels, term duration channels, and risk premia channels, well before it materially started. Ex post difference-in-differences estimation suggests a significant impact on long-term government bond yields, while the impact of the ECB’s first QE on the key inflation rate is very weak. The term duration channel may also lead to a lengthening of the average maturity of government debts, with possible implications for fiscal policy. The ECB’s determination to buy government bonds in a fragmented market with a low net supply is also producing an ex post impact, i.e. during the actual asset purchases. High rates volatility suggests that this impact is less on nominal rates and more on financial plumbing. As the effects of scarce supply in collateral markets are felt, repo rates remain well below zero. Low supply and limited re-usability of high quality collateral, capped by regulatory requirements, is an additional constraint on market liquidity and compresses dealers’ balance sheets. By keeping a depressed yield curve and asset prices high, QE is also accelerating the consolidation of both traditional and capital-market based (dealer) bank business models, raising questions about implications for global collateral flows and deposit-like funding channels.

Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

Asset allocation decisions of international investors are at the core of capital flows. This paper explores the impact of these decisions on long-term government bond yields, using a quarterly investor base dataset for 22 advanced economies over 2004?2012. We find that a one percentage point increase in the share of government debt held by foreign investors can explain a 6?10 basis point reduction in long-term sovereign bond yields over the sample period. Accordingly, international flows to core advanced economy bond markets over 2008?12 are estimated to have reduced 10-year government bond yields by 40?65 basis points in Germany, 20?30 basis points in the U.K., and 35?60 basis points in the U.S. Incontrast, foreign outflows are estimated to have raised 10-year government bond yields by 40?70 basis points in Italy and 110?180 basis points in Spain during the same period. These results suggest that changes in the foreign investor base for sovereign debt can have economically and statistically signifi cant effects on sovereign bond yields, independent of other standard macroeconomic determinants of bond yields.

The price of the euro: evidence from sovereign debt markets

ABSTRACTThe objective of this article is to ascertain how the Economic and Monetary Union (EMU) in Europe has affected its members’ long-term government bond yields. In order to estimate the effect, this article utilizes a synthetic control approach. The main finding is that the majority of the member countries did not receive economic gains from the EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, Finland, France and the Netherlands have paid a positive and substantial euro-premium in their 10-year government bonds since the adoption of the single currency. After the most recent financial crisis, government bond yields have been higher in all member countries compared to the situation that would have occurred without the monetary unification. This article concludes that from the viewpoint of sovereign borrowing, it would be beneficial for a country to maintain its own currency and monetary policy.

Unconventional Monetary Policy in the Euro Zone

The European Central Bank adopted a policy of quantitative easing early in 2015, long after the US and UK, and after implementing a succession of measures to increase liquidity in the Euro zone financial markets, none of which proved sufficient eventually. The paper draws out lessons for the Euro zone from US and UK experience. Numerous event studies have been undertaken to uncover the effects of QE on yields on and prices of financial assets. Estimated effects on long-term government bond yields are then converted into the size of the cut in the policy rate that would normally have been needed to produce them. From these implicit cuts in policy rates, estimates of the effect on GDP and inflation are generated. Euro zone QE appears to have had a much smaller effect on bond yields for the core members states than did QE in the US or UK. Therefore its effects on output and inflation are likely to be proportionately smaller. Its effects on long-term government bond yields in periphery members are greater. QE is compressing interest differential among Euro zone member states. The dangers of QE to which various commentators draw attention, that it creates a danger of inflation in the future, that it creates asset price bubbles, that it allows zombie firms and banks to survive, slowing down the process of adjustment, seem remote. Meanwhile it makes a useful contribution to cutting the costs of debt service and allowing member states more fiscal room for maneouvre.