Debt Market Research Articles

Investor Herding and Spillovers in African Debt Markets

Using high-frequency data for sovereign long-term bond yields and five-year credit default swap spreads, we estimate a regression model to identify a nonlinear link between cross-section deviation of market yield and extreme movements in African markets and other regions. Results indicate that African sovereign bonds have been subject to herding. International investors tend to lump African sovereign bonds into one asset class, pricing risk based on regional market performance instead of individual countries' performance. More over, we find evidence of herding spillovers from other regions. Africa is the most vulnerable of developing regions to shifts in market sentiment.

АУКЦІОННА ТОРГІВЛЯ ДЕРЖАВНИМ І КОРПОРАТИВНИМ БОРГОМ В УМОВАХ КРИЗИ

Анотація. Аукціонна торгівля борговими зобов’язаннями найчастіше використовується в умовах розгортання кризових явищ. Ринок облігацій, державний борг і борг приватних структур виступають як об’єкти емпіричних і науково-прикладних досліджень. Метою нашої наукової роботи є визначення особливостей аукціонної торгівлі і державної боргової політики в умовах кризових ситуацій на основі узагальнення закордонного і вітчизняного досвіду, дослідження процесів вибору форматів аукціонної торгівлі борговими зобов’язаннями на вторинному ринку цінних паперів (ЦП) та управління факторами для усунення викривленості такої торгівлі на фінансових ринках, що сприятиме економічному зростанню. Визначено, що в певному інституційному середовищі розвитку вторинного ринку ЦП, де потенційними покупцями боргових ЦП є інвестиційні організації і банки, у т. ч. іноземні, сучасна практика аукціонної торгівлі і нові формати її проведення супроводжуються встановленням нових правил торгів, зростаючим значенням приватної цінності об’єкта й інформаційного супроводу аукціону. В умовах цифровізації економіки і формалізації взаємопов’язаних процесів і трансакцій на фінансових ринках адекватним має бути механізм аукціонної торгівлі. Доведено, що механізм удосконалення практики аукціонної торгівлі і розширення масштабів упровадження нових форматів її проведення неможливі без узгодження інтересів інвесторів, емітентів і різних зацікавлених сторін для усунення викривленості аукціонних торгів борговими зобов’язаннями на фінансових ринках. Виявлено значні відхилення в темпах росту ВВП і державних боргів, зокрема в Польщі, Японії і в Україні, що пояснюються рівнем довіри до держави і спеціалізованих інституцій з управління боргами, цільовою орієнтацією довгострокової економічної стратегії і монетарної політики в умовах кризових ситуацій, зокрема у країнах ЄС і в Україні. Визначено напрями подальших науково-прикладних досліджень для цілей підвищення гнучкості системи аукціонних торгів борговими зобов’язаннями в умовах кризи і посилення їхнього позитивного впливу на економічне зростання. Ключові слова: аукціонна торгівля, криза економіки, боргові цінні папери, державний борг, вторинний ринок, інвестор, фінансовий ринок, економічне зростання Формул: 0; рис.: 5; табл.: 0; бібл.: 28.

Covid-19 and high-yield emerging market bonds: insights for liquidity risk management

Around the apogee of the pandemic crisis in late March 2020, trading liquidity has evaporated out of high-yield (HY) bond markets across developing states. Concerned about this phenomenon, we assess emerging market (EM) debt liquidity as a combination of three metrics: (i) bid–ask spreads; (ii) relative liquidity score incorporating market depth, trading volumes, and time needed to liquidate an asset; and (iii) round-trip transaction costs—evidencing that all have worsened by the end of the first quarter of 2020. We complement our analysis by tracking the dynamics of the option-adjusted spreads of the EM HY bonds and document that the recovery trends of the credit and liquidity components in bonds spreads have decoupled in the aftermath of the Covid-triggered global meltdown. We evidence relevant differences in bond liquidity between chosen countries, representative of geopolitical regions. All the considered liquidity measures provide a coherent picture of the pandemic impact and allow for insights regarding the recovery from the crisis turmoil and the risk management of the EM HY bond portfolios throughout a systemic crisis.

Uncertainty and the Shadow Banking Crisis: Estimates from a Dynamic Model

Shadow banks play an important role in the modern financial system and are arguably the source of key vulnerabilities that led to the 2007–2009 financial crisis. I develop a quantitative framework with uncertainty fluctuations and endogenous bank default to study the dynamics of shadow banking. I argue that the increase in asset return uncertainty during the crisis results in a spread spike, making it more costly for shadow banks to roll over their debt in the short-term debt market. As a result, these financial institutions are forced to deleverage, leading to a decrease in credit intermediation. The model is estimated using a bank-level data set of shadow banks in the United States. The parameter estimates imply that uncertainty shocks can explain 72% of asset contraction and 70% of deleveraging in the shadow banking sector. Maturity mismatch and asset fire-sales amplify the impact of the uncertainty shocks. First-moment shocks to bank asset return, financial shocks, or fire-sale cost shocks alone cannot reproduce the large interbank spread spike, dramatic deleveraging, or contraction in the U.S. shadow banking sector during the crisis. The model also allows for policy experiments. I analyze how unconventional monetary policies can help to counter the rise in the interbank spread, thus stabilizing the credit supply. Taking bank moral hazard into consideration, I find that government bailout might be counterproductive as it might result in more aggressive risk-taking among shadow banks, especially when bailout decisions are based on bank characteristics. This paper was accepted by Gustavo Manso, finance.

Indian Debt Market: Need for More Reforms

The Indian debt market while made out of securities, both Government and Corporate, is really overwhelmed by G-Sec with more than 90 per cent of Indian debt market, leaving little space for corporate securities. The focal government securities are the dominating and most fluid segments of the security market. Nonetheless, regardless of the expanded volumes, the quantity of members is restricted to around two dozen dynamic players. The focal government securities are the dominating and most fluid segments of the security market. Nonetheless, regardless of the expanded volumes, the quantity of members is restricted to around two dozen dynamic players. Since a lion's share of members is AAA – evaluated and 80 per cent of exchange is immediate, there exist settlement hazards. The market would further develop once uniform guidelines on accounting, valuation and so on are in place. Therefore, this paper highlights the need for more reform in Indian debt market.

Замещение банковского кредита эмиссией рыночных долговых обязательств как мера стимулирования инноваций в экономике страны

В рамках данной статьи рассмотрены принципы кредитования, особые признаки эмиссии рыночных долговых обязательств и преимущества их выпуска. При этом отмечается, что эффективным методом привлечения инвестиций для развития бизнеса является выпуск облигационных займов. В начале XXI столетия в мире наблюдается тенденция роста значимости рынка долговых финансовых инструментов в финансировании деятельности компании и сейчас в развитых странах облигационная масса корпораций составляет порядка 15-65% общих объемов эмиссий корпоративных ценных бумаг. В целом, в рамках традиционной модели развития мировой экономики и общепринятой теоретической модели международного движения капитала предполагается активная работа на финансовых рынках. Сегодня в свете поиска мер поддержки малого и среднего бизнеса, а также мер стимулирования инноваций в экономике страны, на рынок корпоративных облигаций в России возлагаются большие надежды как на перспективный источник дополнительных инвестиционных ресурсов для реального сектора экономики особенно когда вынужденные локдауны из-за пандемии Covid-19 приостановили значительную долю активности реального сектора экономики во всем мире. Автором сделан вывод о том, что, исходя из преимуществ эмиссии долговых ценных бумаг, в долгосрочной перспективе все большее количество компаний будут выбирать данный вид финансирования своей деятельности в качестве основного.

Hidden sovereign finance

Recent scandals in the sovereign debt market have highlighted the risks associated with hidden debt transactions. These are sovereign debt transactions in favour of a central government, substate entity or state-owned enterprise, whose entire existence or whose terms have not been fully disclosed in violation of local administrative or constitutional requirements. The phenomenon was first reported with regard to the Mozambique hidden loans case, but it likely extends to many other countries. The multifaceted nature of this phenomenon makes it difficult to provide a coherent picture. Lenders involved in hidden debt include private banks, state-owned banks, governments, and commodity traders. Products include loans, government guarantees, derivatives, and trade financing schemes linked to commodities exports. The goal of the paper is to provide a framework to analyse the legal and regulatory landscape applicable to these transactions with specific focus on the legal obligations of lenders. At present, there are a number of voluntary standards and guidelines for lenders. These include the UNCTAD’s Principles on Promoting Responsible Sovereign Lending and Borrowing, the recently approved IIF/G20 Voluntary Principles for Debt Transparency. This essay argues that hidden sovereign finance is a multifaceted legal problem, which presents three distinct components: the violation of the borrower’s laws governing public financing, the possible presence of corruption, and the active hiding of the transaction. This means that any effective policy to tame this phenomenon must rely on these three pillars: civil litigation in commercial courts, criminal prosecution of corruption, and loans disclosure to put sovereign finance under closer public scrutiny. In order to make the analysis simpler, I focus on English law and on the practice of English courts.

“Das eigentliche Problem vom Menschen”: Debt, (Ac)Countability, and the Financialization of Wildlife Conservation

In 2019, a new strategy in wildlife conservation was announced: so-called “rhino impact bonds,” designed to support the conservation of African black rhinos, with the ultimate aim of establishing a global “conservation debt market.” This essay takes this development in the financialization of wildlife conservation as an object lesson in the mutual imbrication of guilt, debt, and the (non)human in the age of the Anthropocene. To this end, it traces a theoretical trajectory that explicitly frames the figure of “Man” in terms of Schuld, starting with Nietzsche’s Genealogy of Morals. The essay takes Nietzsche’s “sovereign individual” to refer not to the human species as a whole but rather a specific “genre” of the human, namely what Sylvia Wynter calls homo oeconomicus. In “overrepresenting” himself as the paradigmatic human, this figure has established capital accumulation as the goal of all human life. From here, the essay turns to Walter Benjamin’s characterization of capitalism as a religion whose ultimate aim is not salvation but universal debt/guilt, and finally to Adorno’s account of nature conservation as domination. The rhino bonds represent the logical consequence of this trajectory, namely the expansion of the principle of universal debt to the entire natural world.

Self-fulfilling debt crises, fiscal policy and investment

This paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium, pessimistic beliefs make sovereign debt costly. The government substitutes borrowing with taxation, which depresses private investment and future output, increases default probabilities and verifies lenders' beliefs. This result is reminiscent of the European debt crisis of 2010–12: while recessionary, fiscal austerity may be the government best response to excessive borrowing costs during a confidence crisis. The extent of this type of crises can be reduced by the intervention of an external official lender committing to provide liquidity, or by policies aimed at sustaining private investment.

Does debt market integration amplify the international transmission of business cycles during financial crises?

The international transmission of real business cycles during financial crises differs dramatically depending on the type of debt market integration. Using a bilateral country-pair dataset of 57 countries covering the period 2001–2013, we find robust empirical evidence that short-term debt integration drove business cycle synchronization during the global financial crisis (GFC) and European sovereign debt crisis. However, we also find that long-term debt integration cushioned the international transmission of business cycles during the crises. Our findings distinguish two transmission channels of financial shocks: the balance sheet effect through the integrated short-term debt market and risk-sharing through long-term debt market integration.

Changes in housing construction industry in the RF: securities as an alternative to Shared construction participation agreement

Changes in housing construction entail a corresponding reaction of the real estate market especially with regard to residential real estate since developers have lost “free” funds of shareholders-natural persons. As a result of transition to project financing volume of housing construction has decreased by 14.8% in the Russian Federation over a recent year. Housing construction is characterized by zero and negative profitability in half of entities of the Russian Federation due to low solvency of its population, according to Expert RA Agency [1]. Banks do not provide developers with financial resources in such situation. To achieve success construction companies have to raise additional capital which can be obtained from the public debt market. Improvement of transparency and reliability in the construction industry under the ongoing reform, structurization of developers groups, formation of credit-rating dossier should attract investors’ attention to builders’ securities and reduce the size of risk premium which developers-issuers have to pay today. According to the authors, entering the securities market of 20-30 huge developers in the next 2-3 years will guarantee attraction of investment flows in housing construction in an amount of up to 40 billion rubles.

Income Inequality and Financial Disturbances: Does Income Inequality Engender Financial Crises?

This paper is an empirical study that used econometric techniques to analyze the causal relationship between income inequality and financial disturbances in developed economies. The author used annual data from panels of OECD countries. In this study, income distribution is represented by the share of GDP that accrued to the top 10 percent earners, wage share of GDP, and disposable income Gini Coefficient in annual data series. The test included three channels, through which income inequality may affect the financial system. The results suggest that the effect of income inequality on the national financial stability is ambiguous, as the study concluded that this effect is radically different according to the channel tested. The study found that a rise in income inequality has a negative impact on public finance, but it has a positive effect on the private debt market, and on the external balance from a financial stability standpoint.

FACTORS AFFECTING CREDIT SPREAD IN INDIAN DEBT MARKET

This paper shows that how Macro risk factors affect the credit spread in the Indian debt market. Credit spread is the difference between government bonds and corporate bonds of the same maturity. Various factors impact the spread directly and indirectly. The main focus of this paper to determine the relationship between these factors and find out which factors are explaining credit spread. This paper determines the significance linear dependency of credit spread on various factors through regression analysis. These factors are the market risk factors such as Inflation, GDP growth, and liquidity factors like the Repo rate. This paper will show that whether we are accepting the null hypothesis which states that these factors affect the credit spread or reject the hypothesis of no impact of variables on credit spread

The Informational Role of Investor Relations: Evidence from the Debt Market

ABSTRACTWe explore the role of investor relations (IR) in debt markets. Using earnings announcements as a laboratory, we examine whether, when, and to what extent IR departments help credit investors assimilate information. We find that the presence of IR decreases (increases) the negative (positive) impact on CDS spreads stemming from bad (good) earnings news, suggesting that IR efforts improve information precision and reduce transparency risk. Cross-sectional analyses suggest that IR matters more when uncertainty is high and creditors are concerned about the credit risk implications of firm performance. We also find that IR firms receive higher credit ratings and fewer covenants when issuing bonds, and CDS markets react less negatively when IR firms' bond ratings are downgraded below investment grade. Because firms choose their IR activities, we show that our inferences are robust to multiple methods of addressing endogeneity. Overall, we find that IR departments are influential in debt markets.

Has the Crisis Introduced a New Paradigm in Banks' Credit Allocation? The Non‐financial Corporations' Perspective

AbstractIn the years prior to the onset of the global financial crisis, the sharp credit growth, in a context of optimistic income expectations, boosted by an increase in competition in the banking system, less restrictive lending criteria and favorable financing conditions in international wholesale debt market, led to a marked rise in the debt levels of non‐financial corporations. In this paper, we use a panel data regression, with fixed effect estimators, to study how the relationship between bank credit granted to each firm and a set of firm‐specific indicators, that measure overall balance sheet performance and riskiness, changed over the 2006–2017 period. The results suggest that, during and after the Portuguese sovereign debt crisis, the sensitivity of the bank credit granted to firms to overall balance sheet strength and riskiness of firms increased, except in the case of leverage, where the sensitivity decreased slightly. Nonetheless, banks on average lent more to lower leveraged firms than to higher leveraged firms throughout the period considered. The results also show that statistical significance slightly reduces with the size of the firm and, when compared with the pre‐crisis sub‐period, banks did not increase lending to higher leveraged large firms in the crisis and post‐crisis sub‐periods. Finally, we find that the most capitalized banks were the ones more willing and/or able to support firms, during the crisis, even firms that experienced a deterioration in their indicators.

The Emerging Asia Pacific Capital Markets: Sri Lanka

The capital market of Sri Lanka consists of government securities, stocks, and corporate bonds. All financial instruments have a combined value of about USD 66.3 billion as of July 2020. Government securities contribute the most, with about 63% of the economy. Government securities are issued in both Sri Lankan rupee (LKR) and foreign currency denominated securities. The current stock market formed in 1985 and was later renamed the Colombo Stock Exchange (CSE). The CSE currently has two indices, and the main securities traded include ordinary and preferred shares, close-ended funds (unit trusts), and corporate debentures. Currently 287 entities are listed on the CSE, with stocks contributing 16% of the economy. The corporate bond market became active in 2013, with the introduction of incentives from the government, including the exemption of interest income received from listed debt from income and withholding taxes. The market capitalization of the listed corporate debt market reached LKR 257.9 billion in July 2020. The Securities and Exchange Commission (SEC) and the CSE have focused on expanding the contributions made by corporate debt in the capital market. The CSE faces many challenges, including the need to increase corporate listings, liquidity, and foreign investor participation as well as to broaden the depth of financial instruments. A master plan has been developed with the SEC to develop the Sri Lankan capital market to be on par with global exchanges, beginning with the South Asia region. Importance has been placed on attracting global investors and developing new financial instruments. Development of capital market–related infrastructure has included measures to set up and implement a risk management system, a delivery versus payment settlement method, and a central counterparty clearing house. The SEC has also facilitated the introduction of real estate investment trusts (REITs), as a forward-looking step in its market development strategy.

Infrastructure Investment in India: Squaring Theory, Data and Common Sense

The study makes a novel attempt to estimate the quantum of funds channelised in the physical infrastructure sector, by the private–public split as well as per project parameters. The study finds a downward trend in the private investment in infrastructure post 2009–2010. This needs to be understood in correspondence with the rise in the number of stalled/shelved projects under private ownership post 2008–2009. This rise in the locked-in finances could explain the disincentive in making fresh investments by the private sector. However, what this data also reveals is that the average per stalled/shelved project cost is higher under public ownership even though the number of such projects isfound higher under private ownership. Lumpy project investments are locked in public projects that can be viewed as a real cost. Fiscal prudence leaves little scope for further extension of finances from the government’s kitty in this domain. Moreover, commercial banks cannot be relied on due to the staggering share of non-performing assets emanating from the over exposure to this sector. A market for long-term debt could be a panacea for the perils facing the sector as well as the stressed banking sector. JEL Codes: E01, E22, E69, G31

The state of global public debt and new approaches towards debt management

This article is devoted to the state of public global public debt and new approaches towards its regulation in both developed and developing countries. The subject of this research is public debt in different groups of countries. Analysis of the situation with global public debt and the peculiarities of its regulation is necessary to learn positive foreign experience for its possible application in Russia. The following factors of significant increase of public debt are outlined: severe reduction of economic activity and decline in government revenue; increase of public spending, including related to anti-crisis measures; growing primary deficit, and this, the need to increase borrowings. The countries with low and middle income additionally face significant capital outflows from their financial markets, devaluation of national currencies, and difficulties with debt refinancing. Analysis is conducted on the structure and dynamics of public debt that developed due to the COVID-19 pandemic. The author describes the risks associated with public debt. It is noted that many developed countries were able to adjust their financial operations in response to the growing need for borrowed funds: change the existing mechanisms for entering the debt market; amend the practice of conducting auctions government securities auctions. Developing countries need debt restructuring. The conclusion is made that the debt relief process requires new approaches towards debt management, including new methods of risk mitigation, enhanced control aimed at countering “credit bubbles”; clear regulation of debt restructuring observed by all creditors.

Linguistic tone of management discussion and analysis disclosures and the municipal debt market

PurposeAs the management discussion and analysis (MD&A) section contains discretionary narrative disclosures regarding a government's yearly financial changes and status, the authors investigate several municipal debt market consequences of linguistic tone within these disclosures.Design/methodology/approachThe authors textually analyze municipal MD&As with Linguistic Inquiry and Word Count (LIWC) software and develop narrative tone measures based on existing financial-specific dictionaries. Using a final sample of 446 municipal bond issuances from 2012 to 2016, the authors modify the current bond regression models to examine the association between MD&A disclosure tone and future bond interest costs or rating disagreements.FindingsThis study’s empirical analysis suggests that more negative MD&A tone is associated with higher future debt costs and greater future disagreements among bond rating agencies.Practical implicationsOverall, the evidence implies that municipal bond stakeholders use the information in narrative disclosures when evaluating risk, but that the qualitative nature can introduce differences in interpretation between users. Furthermore, additional training in MD&A writing and further standard guidance in MD&A disclosures could improve the MD&A's informativeness for bond market decision-making and state-level monitoring.Originality/valueThis study is first to incorporate narrative tone measures into bond models in a governmental context.

Dynamics of secured and unsecured debt over the business cycle

This paper studies corporate debt structure over the business cycle and its implications for aggregate macroeconomic dynamics. We develop a tractable macro-finance model featuring debt heterogeneity with both secured and unsecured debt. Unlike secured debt, unsecured debt gives the lenders no access to the borrowers' assets in the event of default, and borrowers keep their assets at the cost of losing future access to the unsecured debt market. The difference in the nature of debt contracts leads to different risk taking behavior in the two debt markets. Our model generates strongly procyclical unsecured debt and weakly procyclical secured debt, in line with the stylized facts in US data. Moreover, we show that the inclusion of heterogeneous debt structures creates additional amplification effects relative to Bernanke et al. (1999).