Sovereign Bond Market Research Articles

Optimal Monetary and Fiscal Policies to Maximise Non-Parallel Risk Premia in Sovereign Bond Markets

In this paper, we analysed several emerging market (EM) and developed market (DM) sovereign yield curves to identify the proportion of parallel and non-parallel shifts over time. We found that non-parallel shifts are more prevalent in EM due to higher political and economic risks. Key drivers include systemic risk events like wars, debt distress, and pandemics. By backtesting a long butterfly strategy to extract non-parallel risk premia from June 2007 to March 2024, we observed that steeper slopes and greater curvature result in higher returns. We also quantified monetary and fiscal regimes to determine what types of policies are required to extract non-parallel risk premia from these sovereign yield curves. Our research suggests that countries with opposing monetary and fiscal policies possess higher return opportunities whilst countries with complementing policies require tactical butterfly strategies to optimise returns.

Zero coupon yield curve dynamics in the Russian sovereign bond market

Yield curve is a graphical representation of a relationship between interest rates and maturity. Shape of yield curve often attracts attention of analysts, because it represents market implied expectation of future interest rate path. However, the analysis of the yield curve shape often lacks theoretical foundation. It is based either on review of term spreads or on a simple visual investigation. In this article we formally define the shape of the yield curve in terms of function invariants. We use Nelson–Siegel model as a backbone for our classification and show that there exists only six possible shapes of yield curve. They are: a normal upward slopping yield curve, inverted yield curve, humped upward slopping, dipped upward slopping, humped inverted and dipped inverted. We analyze dynamics of zero coupon yield curve in Russian market based on real historical data. We show that transition from an upward slopping curve to an inverted one was always preceded by a hump at mid-tem maturities, while the transition back was always done through the dip. This highlights the importance of mid-term rates in reshapening the curve. We explain this behavior by short end of the curve being linked to the key rate and thus being more sticky. The contribution of the paper is twofold. First, it provides a formal framework to analyze the shape of the yield curve. Second, it describes the patterns in dynamic of the ruble yield curve that can be useful for bond investors in the Russian market.

Monetary and Fiscal Policy Impacts on the Indian Sovereign Bond Market: A VAR Approach

This study analyses the dynamic relationship between yield curve behaviour and the macroeconomy in India, with a focus on both monetary and fiscal policy impacts. Using the monthly data on yields of Treasury bills and government securities from April 2000 to March 2020, we employ principal component analysis to extract the three yield curve factors—level, slope and curvature. We then use an unrestricted vector autoregressive model to analyse the relationship between these three yield curve factors and macroeconomic variables: inflation, GDP growth, exchange rate and monetary and fiscal policy indicators. Our findings reveal a bidirectional causality between yield curve factors and macroeconomic variables. Monetary policy plays an important role in shaping the yield curve, with short-term rates having more pronounced effects than long-term rates. Notably, this study is among the first to incorporate fiscal policy indicator in the Indian context, providing a more comprehensive understanding of policy impacts on the sovereign bond market. Our results offer valuable insights for policymakers and investors, showing the interrelationship of fiscal and monetary policies with bond market dynamics in emerging economies. This research contributes to the growing macrofinance literature and enhances our understanding of financial market dynamics in a developing economy. JEL Classification: E430, C32, G120, E44

Financial liberalization or state capitalism? The developmental state and the special purpose bond market in South Korea

ABSTRACT South Korea's state-guaranteed bond market was nearly half the size of its sovereign bond market in 2022, and in the early 2000s, it was nearly twice the size of the latter. What explains the overwhelming prominence of this fixed-income market? This paper finds that the prominence of this market is a path-dependent consequence of developmental legacies and the Asian Financial Crisis. State-guaranteed bonds allowed the state to circumvent conditionalities that limited the state's ability to access domestic savings for policy objectives and helped shield the newly established sovereign bond market from premature supply pressure. This finding demonstrates that the state not only supports or creates markets but also uses markets to maintain its influence against external pressure. It also explains how the South Korean state was able to maintain its developmental policies after market liberalisation by tracking the post-crisis flow of domestic savings.

Liquidity Unveiled: Crafting an Index to Decode the Sovereign Bond Market Risk

Liquidity Unveiled: Crafting an Index to Decode the Sovereign Bond Market Risk

Exploiting non-parallel risk premia in the South African sovereign bond market

Background: This study focuses on diversifying fixed income attribution beyond yield and duration by identifying new risk premia applicable to various investment strategies.Aim: To identify cross-sectional bond risk factors in the South African sovereign bond market, capitalising on non-parallel shifts during high-risk macroeconomic events, developing a strategy to extract persistent alpha from higher order interest rate risks and disproving the strong efficient market hypothesis.Setting: This study finds that during high-risk macro events, non-parallel shifts increase in frequency. Empirical evidence suggests that post the 2008 financial crisis, there have been increased occurrences of risk-on/off events and researchers believe high risk macro events will increase in prominence. As such, most active US fixed income managers have reduced duration risk (from parallel shifts) in favour of alternative risk premia.Method: This study exploits slope and curvature risks, by utilising a butterfly strategy. Ten bond risk factors are back-tested and analysed during interest rate cycles, curve scenarios and risk-off periods from 1998 to 2023.Results: The top-ranked strategies displayed strong and persistent outperformance over the bottom-ranked strategies for most of the bond factors especially during risk-on episodes. The Bond All-Factor Rank demonstrated improved diversification by balancing upside and downside risks. Trade costs are an important factor that requires pragmatic management.Conclusion: Geopolitical risks are increasing in frequency and developing a strategy to exploit non-parallel risk premia is an attractive proposition.Contribution: This study identified new bond risk factors beyond the conventional spread factor to extract non-parallel risk premia.

The Global Dash for Cash: Why Sovereign Bond Market Functioning Varied across Jurisdictions in March 2020

In March 2020, the economic disruptions associated with the COVID-19 pandemic prompted a global dash for cash by investors. This selling pressure occurred across advanced-economy sovereign bond markets and caused a deterioration in market functioning, leading to central bank interventions. The authors show that these market disruptions occurred disproportionately in the U.S. Treasury market and were due to investors’ selling pressures being far more pronounced and broad-based. Furthermore, the authors assess differences in key drivers of the market disruptions across sovereign bond markets, based on an analysis of the data as well as outreach to a range of market participants.

New insights into liquidity resiliency

In this study we offer fresh insights into liquidity resiliency. We empirically study the resiliency of the euro area sovereign bond market across the maturity spectrum. We measure resiliency using a standard Ordinary Least Squares regression approach, along with the least absolute shrinkage and selection operator (LASSO) machine learning approach. We find both spread-based and depth-based resiliency are negatively correlated with spreads and positively correlated with depths. Moreover, we study the interrelationships among resiliency, volatility, returns, and credit default swap (CDS) spreads. Lastly, we document strong commonalities in resiliency for core and periphery euro area markets in both calm and turbulent periods.

Exploring Volatility and Spillover Effects between African Sovereign Bond Markets and Global Long-Term Interest Rates

The study investigated the existence of volatility and spillover effects between sovereign bond returns of South Africa and Ethiopia and the world’s long-term interest rate using multivariate generalized autoregressive conditional heteroskedasticity model. The results showed that volatility from the long-term world interest rate negatively affects the Ethiopian sovereign bond market. The results also showed a one-way spillover from South Africa's market to the U.S. long-term market, then from the U.S. to Ethiopia's market, and further from Ethiopia's to South Africa's market. However, no bidirectional spillover was observed within these markets. Besides, both African markets display high volatility persistence. Besides, the markets have a weak or insignificant correlation with the world’s long-term interest rate. Volatility in the markets is significantly affected by their respective past shocks or volatilities. Finally, it has forwarded policy inputs that should be tailored to the specific economic and financial context of each country.

Delegating Discipline: How Indexes Restructured the Political Economy of Sovereign Bond Markets

Previous articleNext article No AccessDelegating Discipline: How Indexes Restructured the Political Economy of Sovereign Bond MarketsBen Cormier and Natalya NaqviBen Cormier Search for more articles by this author and Natalya Naqvi Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by The Journal of Politics Just Accepted Sponsored by the Southern Political Science Association Article DOIhttps://doi.org/10.1086/723997 Views: 41Total views on this site HistoryAccepted December 12, 2022 © 2023 Southern Political Science Association. All Rights reserved.PDF download Crossref reports no articles citing this article.

Government Interventions and Sovereign Bond Market Volatility during COVID-19: A Quantile Analysis

We test the interaction between governments’ COVID-19 interventions, COVID-19-induced uncertainty, and the volatility of sovereign bonds. Different from previous literature, we investigate the asymmetric response of bond market volatility to both governmental interventions and COVID-19-induced uncertainty. With a focus on the first waves of the pandemic and using a panel quantile approach and a comprehensive dataset of 31 countries worldwide, we document that containment and closure policies tend to amplify volatility. Furthermore, the price variability is augmented by the spread of the pandemic itself. On the contrary, economic support policies have a substantial stabilizing effect on bond price fluctuations. Both phenomena are not subsumed by additional control variables and are robust to multiple considerations. Our findings may serve financial market participants in their risk management decisions, as well as policymakers to better shape their preparedness for future pandemics.

Geopolitical Risks and Yield Dynamics in the Australian Sovereign Bond Market

Geopolitical risks and shocks such as military conflicts, terrorist attacks, and war tensions are known to cause significant economic downturns. The main purpose of this paper is to determine the dynamics between Australian sovereign bond yields and geopolitical risk. This is achieved by employing a quantile regression analysis. The findings of this study indicate that the impact of geopolitical risk on Australian sovereign yield dynamics is asymmetrical. Furthermore, an increase in geopolitical risk only impacts short-term yields at extreme regimes. However, the impact is, by and large, insignificant. On the other hand, an increase in geopolitical risk does have a statistically significant positive impact on medium- and long-term yields across most quantiles. Lastly, an increase in geopolitical risk tends to result in a steeper yield curve at the belly of the curve but causes the yield curve to flatten at the long end. This study is the first study that holistically examines the dynamics between geopolitical risk and Australian sovereign bond yields. The study thereby contributes to the body of knowledge on Australian bond yields, specifically, and adds to the sparse body of knowledge on the dynamics between geopolitical risk and sovereign bond yields. The findings of this study have implications for monetary policy makers, given that shifts in sovereign bond yields could impact all three core mandates of the Australian Reserve Bank. Furthermore, changes in the slope of the yieldcurve could be used by monetary policy makers to pre-empt changes in future economic growth. The results of this study also relate to fiscal policy formulation, given that yields directly impact the cost of government borrowing. Lastly, portfolio managers could benefit from the results of this study, as these results provide information on the ability of Australian sovereign bonds to hedge against geopolitical risk.

On illiquidity of an emerging sovereign bond market

On illiquidity of an emerging sovereign bond market

The Impact of the Social Mood on the Italian Sovereign Debt Market: A Twitter Perspective

By analysing the relationship between a new experimental daily index based on Twitter data (the Istat’s Social Mood on Economy Index—SMoEI) and the structure of Italian (and Spanish) sovereign interest rates, our work sheds new light on the great significance of the interconnections between economic sentiment and the Italian sovereign bond market. A placebo test performed on Spain introduces a possible extension of this linkage to the European market, highlighting the deep integration of financial markets within the European Monetary Union. Within a VAR and VECM framework with daily frequency data (2016–2022), we show that public shaping mechanisms play a role in the cost of debt financing. Our analysis emphasises the importance of economic sentiment when it comes to financial markets, putting the role of macroeconomic fundamentals in a different light. This result should be interpreted with caution, as updates to fundamentals can be affected by a time lag. In any case, recognising the importance of this index has at least two implications: on the one side, the SMoEI could represent a more responsive indicator for predicting investor sentiment; on the other side, media channels—as well as the European and national institutions—should gain relevance for their potential impact on collective sentiment, encouraging the importance of economic education and non-alarmist communication.

Uncertainty and Crisis in Sovereign Bond Markets: A Threshold Regression Model for Greek Sovereign Spreads

Uncertainty and Crisis in Sovereign Bond Markets: A Threshold Regression Model for Greek Sovereign Spreads

Climate Transition Risk in Sovereign Bond Markets

Climate Transition Risk in Sovereign Bond Markets

Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries

Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries

The pandemic emergency asset purchase and the sovereign bond market connectedness

We examined the extent to which the biggest euro area sovereign bond markets are connected during the 2017-2020 period. Accordingly, we used the recent Gabaue (2020)'s approach viewed as an alternative to Diebold and Yilmaz's volatility connectedness methodology. We find that such markets are considerably connected during the whole period and the spillovers are relatively time varying. The results also show that the Spanish bond market is the primary net transmitter of shocks, followed by the Italian bond market, while the markets for Germany and France are the main net receivers. Second, we highlight some contribution of ECB's asset purchase and other monetary policy announcements to bilateral spillovers. Also, some pronounced spillovers are found to be generated from the monetary policy in US. Finally, the effect differs widely across bilateral linkages in terms of sign and magnitudes. A likely explanation is that investors started discriminating more through markets.

The Pandemic Emergency Asset Purchase and the Sovereign Bond Market Connectedness.

The Pandemic Emergency Asset Purchase and the Sovereign Bond Market Connectedness.

The Global Dash for Cash: Why Sovereign Bond Market Functioning Varied Across Jurisdictions in March 2020

The Global Dash for Cash: Why Sovereign Bond Market Functioning Varied Across Jurisdictions in March 2020