Sovereign Bond Yields Research Articles

Monetary and Fiscal Policies and the Dynamics of the Yield Curve in Morocco

We estimate the latent factors that underlie the dynamics of the sovereign bond yield curve in Morocco during 2004–14 based on the Dynamic Nelson-Siegel model. On this basis, we explore the interaction between macroeconomic variables and the yield curve, which is of direct relevance to macroeconomic policy-making. In Morocco’s context, we find that tighter monetary policy increases short-end maturities, and that the impact is small and short-lived. Economic activity is also briefly but significantly impacted, suggesting that even under a pegged exchange rate, monetary policy autonomy and effectiveness can be increased through greater central bank independence. Fiscal improvements significantly lower yield levels. Policy conclusions are that improvement in the fiscal and monetary policy frameworks, as well as greater financial sector development and inclusion, could benefit Morocco and strengthen the transmission mechanisms and effectiveness of macroeconomic policies.

Monetary and Fiscal Policies and the Dynamics of the Yield Curve in Morocco

We estimate the latent factors that underlie the dynamics of the sovereign bond yield curve in Morocco during 2004–14 based on the Dynamic Nelson-Siegel model. On this basis, we explore the interaction between macroeconomic variables and the yield curve, which is of direct relevance to macroeconomic policy-making. In Morocco’s context, we find that tighter monetary policy increases short-end maturities, and that the impact is small and short-lived. Economic activity is also briefly but significantly impacted, suggesting that even under a pegged exchange rate, monetary policy autonomy and effectiveness can be increased through greater central bank independence. Fiscal improvements significantly lower yield levels. Policy conclusions are that improvement in the fiscal and monetary policy frameworks, as well as greater financial sector development and inclusion, could benefit Morocco and strengthen the transmission mechanisms and effectiveness of macroeconomic policies.

The Pass‐through of Exchange Rate in the Context of the European Sovereign Debt Crisis

AbstractThis paper investigates whether exchange rate pass‐through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so‐called GIIPS group (Greece, Ireland, Italy, Portugal and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, that is, when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis have entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass‐through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits. Copyright © 2015 John Wiley & Sons, Ltd.

The relation between sovereign credit rating revisions and economic growth

Abstract A country’s economic growth exhibits a significant response to sovereign rating changes: a one-notch upgrade (downgrade) causes an increase (decline) of about 0.6% (0.3%) in re-rated countries’ five-year average annual growth rates. The results hold after accounting for other determinants of economic growth and potential endogeneity problems, and are robust to the use of quarterly data. Changes in country rating affect economic growth via the interest-rate and capital-flow channels: narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades, which stimulate re-rated countries’ economic performance, and the converse holds for downgrades.

The Determinants of Sovereign Bond Yield Spreads in the EMU: A GVAR Model

The literature about the sovereign yield spreads grew substantially with the euro debt crisis, mainly because of the rising concerns about the Eurozone future and the skepticism regarding the radical shifts in few EMU countries’ interest rates which cannot be explained by standard models. With unsustainable borrowing cost levels, Greece, Ireland and Portugal lost access to the market and part of the public opinion condemned what they called a market irrational behavior. Academics try to bring new lights to these market reactions.Our paper aims to contribute to the growing body of literature that studies the determinants of bond yield differentials in the Eurozone and differs in many ways from the previous works. First of all, we use longer data sets, which cover the recent Eurozone crisis events. Then, we use a new risk aversion proxy based on European data, which can be described as the difference between the euro corporative bond indexes Bbb and Aaa. We also perform an event study of the European Commission fiscal forecasts publication for European countries to help specify our model with the fiscal fundamentals that significantly influence the spreads. Finally, this paper proposes a new application of a GVAR model for the sovereign bond spreads analysis in the Eurozone that outperforms standard models thanks to the inclusion of fiscal fundamental and contagion variables. Indeed we extend the Global Vector Autoregressive (GVAR) model introduced by Favero (2013) in whom we add variables capturing the credit risk (real GDP growth), the contagion effect and a dummy variable for the crisis.The results estimated with our GVAR model suggest a lack of consensus among euro countries and significant differences between the GIIPS and the Core countries in terms of spreads determinants. Moreover by taking the model to country by country data, the R-squared drastically increase which shows the importance of idiosyncratic behavior in the spreads movements. Overall, we find that the sovereign bond yield spreads were mainly influenced by the expected debt to GDP, the risk aversion and the contagion factors, which is in line with the related literature findings.

Mixed Signals: IMF Lending and Capital Markets

The effect of new International Monetary Fund (IMF) lending announcements on capital markets depends on the lender’s political motivations. There are conditions under which lending reduces the risk of a deepening crisis and the risk premium demanded by market actors. Yet the political interests that make lenders willing to lend may weaken the credibility of commitments to reform, and the act of accepting an agreement reveals unfavorable information about the state of the borrower’s economy. The net ‘catalytic’ effect on the price of private borrowing depends on whether these effects dominate the beneficial effects of the liquidity the loan provides. Decomposing the contradictory effects of crisis lending provides an explanation for the discrepant empirical findings in the literature about market reactions. This study tests the implications of the theory by examining how sovereign bond yields are affected by IMF program announcements, loan size, the scope of conditions attached to loans and measures of the geopolitical interests of the United States, a key IMF principal.

Bond Yield Spreads in the Eurozone

Abstract Euro Area sovereign bond yield spreads fell significantly after the creation of the monetary union and moved in unison until the recession of 2008, when investors’ risk pricing changed considerably. Rising bond yield spreads caught the attention of economists who tried to find the factors influencing their size. Evolution of bond spreads was mostly related to various macroeconomic factors as well as the soundness of the countries’ banking sectors and a general level of risk aversion in the financial markets. Analysis presented in this paper compares bond yield spreads of Euro Area member countries and relates them to their debt levels as well as the liquidity of the securities and a general level of risk aversion. Apart from the usual variables, we also analysed differences in purchasing power to assess the impact of the common monetary policy in the pre-crisis period. After adjusting the model to better explain movements of linear regression residuals, we could not prove a systematic assessment of the above-mentioned factors except for time periods of high market volatility. We explain sudden changes in the importance of idiosyncratic factors as consequences of policies of the European Central Bank and other European Union institutions following such time periods, which, as our analysis suggests, distorted pricing of risk in the markets.

The Capco Exit Probability Index (CEPIX): Methodology and History of an Index Expressing Euro Exit Likelihoods

The Cepix (Capco Exit Probabilty Index) project aimed at providing the market with a quick summary index expressing the likelihood that each country in the Eurozone could leave the Euro. It was offered online for free from the end of 2012 to the end of 2014, for two years, at Capco dot com. The index follows a simple formula that combines information from sovereign bond yields, GDP and debt, and credit ratings. The main idea is to combine responsive but often too volatile market implied default probability information from bond prices with more stable but less responsive traditional credit ratings information. The weights in the combination are decided based on macroeconomic data, namely GDP and Debt. The index history on some key moments and entities helps illustrating the interesting features of the index methodology.

Kernel Estimation of Copula Densities and Applications

In this paper, we study the kernel estimation of the copula density on unit square [0,1]X[0,1], and demonstrate the implementation of this methodology to equity and bond markets. There are two crucial problems associated with this estimator. First, the kernel estimator is biased at the boundaries. Second, the kernel estimator is sensitive to both kernel and bandwidth. To correct the boundary effects, we propose a Gaussian copula (GC) kernel and a logit transformation (LT) kernel estimators, and derive their asymptotic properties. Moreover, we introduce a Bayesian approach to bandwidth and kernel selection, and an L2-type goodness-of-fit test. We conduct a simulation study to assess the finite sample performance of the GC and LT kernels, and two comparable kernels based on Gaussian transformation (GT) and mirror-reflection (MR), with the Bayesian and likelihood cross-validation (LCV) bandwidths. The results show that the performances of the Bayesian and LCV bandwidths are more or less the same. The performance of the kernel functions depends largely on the shapes of the underlying copula densities. The GC kernel density estimate fits the copula density of All Ords and S&P 500 returns well. The t-copula fits the copula density of sovereign bond yield spreads of Greece and Spain well.

The Impact of Textual Sentiment on Sovereign Bond Yield Spreads: Evidence from the Eurozone Crisis

This study examines the relation between textual sentiment (media pessimism), the concentration/volume of news, and sovereign bond yield spreads, specifically in Greece, Ireland, Italy, Portugal and Spain during the European sovereign debt crisis from 2009 to 2012. The findings suggest that higher media pessimism and greater concentration/volume of news collectively communicate additional value-relevant information that has not been quantified by traditional determinants of yield spreads. If higher media pessimism is coupled with greater concentration/volume of news and other factors remain unchanged, yield spreads would move upwards, causing prices to fall. Media pessimism and the number of news stories respectively and collectively help predict the widening of yield spreads. Higher media pessimism level is strongly associated with more news stories being reported, suggesting that “no news is good news.”

Time-Scale Analysis of Sovereign Bonds Market Co-Movement in the EU

We study the co-movement of the 10-year sovereign bond yields of 11 EU countries. Our analysis is focused mainly on changes in co-movement during the financial crisis period, especially around two significant dates - the fall of Lehman Brothers, September 15, 2008, and the announcement of the increase of Greece's public deficit on October 20, 2009. We study co-movement dynamics using wavelet analysis, which allows us to observe how co-movement changes across frequencies and over time. We divide the countries into three groups: the core of the Eurozone, the periphery of the Eurozone and the states outside the Eurozone. The results indicate that co-movement decreased considerably during the crisis period for all country pairs but that there are significant differences among the groups. Furthermore, we demonstrate that the co-movement of bond yields is frequency dependent.

Nonlinear spillovers between euro area sovereign bond markets

Summary: This paper examines nonlinear spillover effects between sovereign bond markets of six euro area countries (France, Ireland, Italy, Germany, Portugal, and Spain), four of which were among the hardest hit by the sovereign debt crisis, by applying a nonlinear Granger causality test of Diks and Panchenko (2006). The test is applied on the sovereign bond yield dynamics (i.e. yield changes) time series for the time period from 3 January 2000 - 31 August 2011. We also test for pure spillovers between sovereign bond yield dynamics, i.e. the spillovers after controlling for common and regional factors that impact the sovereign bond yield changes of all countries simultaneously. To verify if the nature of spillovers has changed after the start of the euro are sovereign debt crisis, we test for the nonlinear spillovers for the whole observed period and separately for the period before and after the start of the euro area sovereign debt crisis (period from the start of April 2010 until the end of our sample, i.e. 31 August 2011). The results of our study show that strong bi-directional Granger causality exists between the investigated sovereign bond markets. Very similar results are obtained whether the regional and world factors are or are not controlled for. We find strong bi-directional non-linear Granger causality for the investigated euro area countries prior the euro area sovereign debt crisis. After the start of the euro area sovereign debt crisis the interdependence between the markets has reduced. We can no longer detect non-linear spillovers running from Germany and France to the periphery euro area countries. The findings of this study have important implications for the policymakers as they show that shocks spill-over quickly across the sovereign bond markets and the intensity and nature of spillovers can change throughout time. The sovereign bond markets of the core euro area decoupled from the periphery euro area sovereign bond markets after the start of euro are debt crisis. The findings are also of relevance for individual investors in the sovereign bond markets for the purpose of portfolio diversification.Keywords: sovereign bond markets, spillovers, non-linear Granger causalityJEL classification: F21, F36, G15, H63(ProQuest: ... denotes formulae omitted.)IntroductionSince the early 2010 euro area sovereign debt crisis has been on the top of the international, especially euro area economic policy agenda. The euro area sovereign debt crisis, triggered by mounting concerns about the public debt sustainability of Mediterranean countries and Ireland quickly spread across (i.e. spilled-over to) the euro area sovereign bond markets, thereby raising the question of public debt sustainability and management and the macroeconomic effects of the sovereign debt crisis. Prompted by financial market pressures, large-scale fiscal austerity measures have been announced in practically all monetary union member states.The knowledge of the size and nature of exposure of sovereign bond to market spillovers can help policymakers gain insight into public financing constraints and the external risks faced by national economy and their economic agents (Metiu, 2011). This knowledge is relevant also for private financial market participant. Since the works of Markowitz (1952) and empirical evidence of Grubel (1968) financial practitioners adhere to international diversification in order to reduces total risk of their international portfolio(s). When spillovers occur, the dependence between the returns of assets increases and the advantages of international diversification of investment portfolio reduces (Ling and Dhesi, 2010). Rational investors shall respond to changing patterns in dependence by adjusting their portfolios (Savva and Aslanidis, 2010).The most frequently applied methods in the literature on financial markets interdependence include the vector autoregressive (VAR) models, Granger causality tests (Malliaris and Urrutia, 1992, Gilmore and McManus, 2002), GARCH models (Tse and Tsui, 2002; Bae et al. …

How Might Sovereign Bond Yields in Asia Pacific React to US Monetary Normalisation Under Turbulent Market Conditions?

This paper examines the potential impact of US monetary normalisation on sovereign bond yields in Asia Pacific. We apply the quantile vector autoregressive model with principal component analysis to the assessment of tail risk of sovereign debt, which may not be detectable using traditional OLS-based analysis. Our empirical evidence suggests that US Treasury bond yields can have a significant impact on sovereign bond yields in the region, an important channel through which monetary normalisation by the Fed can affect Asia-Pacific economies. Increases in sovereign bond yields will not only compromise the ability of the sovereigns in the region to service their debt but also translate into higher costs of borrowing for the rest of the economy. The results show how much the outsized impact could potentially be if US monetary normalisation somehow turns out to be much more disorderly than expected.

An empirical investigation of the nexus between sovereign bond yields and stock market returns – a multiscale approach

This paper studies comovement between changes in sovereign bond yields and stock market returns for ten Eurozone countries (Austria, Belgium, Finland, France, Ireland, Italy, Germany, Netherlands, Portugal, and Spain) in the period from January 2000 – end of August 2011, applying the maximal overlap discrete wavelet transform (MODWT) variance and correlation tools. We found that the for all but one country (namely Portugal) the stock return volatility is higher than the volatility of sovereign bond yield changes across all wavelet scales. The highest volatility in stock indices’ returns and bond yield changes is captured by lower level MODWT wavelet coefficients (i.e., level 1 ( ) MODWT wavelet coefficients, associated with dynamics over 2 to 4 days and level 2 ( ) MODWT wavelet coefficients associated with dynamics over 4 to 8 days). A practical implication stemming from this finding is that investors with short investment horizons that want to efficiently manage the risk of their portfolio investments have to respond to every fluctuation in realized returns or bond yield changes, while for an investor with a much longer horizon, the need to do this is reduces, as long-run risk is significantly smaller as indicated by the variance. The results of the paper show also that the estimated wavelet correlation changes with the time scale and is mostly positive for all countries but Portugal. The statistical evidence against hypothesis of no multiscale dependence yet is weak. Thus we cannot statistically claim that the wavelet coefficients at higher scales are significantly different (either higher or lower) that those at lower scales. For the financial markets of Portugal and Germany we proved that the dependence between stock and sovereign bond market dynamics may not be just a multiscale phenomenon, but may also exhibits time dynamics across scales. The rolling-window wavelet correlation estimates show that at all scales correlation turned negative for Portugal at the start of 2010 – this is when the Eurozone debt crisis started which also hit hard the Portugal sovereign bond market – thus probably causing the ˝average˝ wavelet correlation for Portugal for the whole observed period to be negative. DOI: http://dx.doi.org/10.5755/j01.ee.26.2.6416

Understanding Emerging Market Sovereign Bond Yield Spread: Role of Default and Non-Default Determinants

This paper is motivated by the fact that emerging market assets size has been expanding and trying to use sovereign debt market as part of capital market as main research focus. It is highlighting the distinction between default and non-default determinants and examining their significance in explaining emerging market sovereign bond yield spread. Using Cross-Sectional Fixed-Effect Panel Estimator, we found that both default (as proxied by Credit Rating and Outlook Index) and non-default (as proxied by 3-month Fed Funds Futures) determinants has significant explanatory power to sovereign bond yield spread. Extensively, we also found the significance to add volatility of 3-month Fed Funds Futures and Fed Target Rate basis and volatility of advanced stock markets as variables to stand for non-default determinants in the model. The significance of the latter model is strengthened by higher forecasting as well as indicates the significant role of US market to emerging market sovereign bond market.

Short- and long-run behaviour of long-term sovereign bond yields

We assess the short- and long-run behaviour of long-term sovereign bond yields in OECD countries using a dynamic panel approach to reflect financial and economic integration. Given the existence of cross-country dependence regarding sovereign yields and its determinants, we resort to simulation and bootstrap methods. Results based on the Common Correlated Effect estimator of Pesaran and on Panel Error Correction Models to sort out short- and long-run fiscal developments show that in addition to common movements in sovereign yields, investors also consider country differences arising from specific factors (inflation, budgetary and current account imbalances, real effective exchange rates, and liquidity).

Analysis of the Evolution of Sovereign Bond Yields by Wavelet Techniques

The term ”wavelets” covers a set of resources from the mathematical analysis that have proven their efficiency in system identification on areas such as hydrology, geology, glaciology, climatology and energy resources optimization. The methodology undergone on systems engineering could be extrapolated to everything conceptualized as ”complex system” whatever its nature. The wavelet techniques provide the description of non-stationary components and the evolution of macroeconomic variables in the frequency domain. The identification of predominant frequential scales and transient effects in time series, highlights the multiresolucional analysis, that would be more difficult to treat with traditional methods of econometrics. A review of the literature will show the potential problems that can be solved with these techniques, such as prediction of benefits calculated on the evolution of the risk premium of a country, the extraction of symmetric macroeconomic shocks in country clusters, or detection of transient effects on the mutual influence of sovereign bonds between pairs of countries, among others. The dissertation will culminate in specific applications that show the power of wavelet techniques in identifying possible determinants and correlation of the evolution of sovereign bond yields in the euro area countries.

Does news on the euro area impact the sovereign yield spreads?

This paper presents the impact of news on euro area sovereign bond yield spreads vis-a-vis Germany at daily frequency. The analysis is conducted for both 5- and 10-year debts for the period from 15 May, 2012 until 23 April, 2014. An innovative aspect of the study lies in the use of 'Eurointelligence' newsflash to construct our news data. Our empirical analysis produces a number of novel results that support the evidence that news is an important driver for sovereign yield spreads. We specifically find that more news regarding the country-specific crisis raises the yield spreads. Moreover, we find that higher news in one selected country implies an increase in the yield spreads of other countries. Regarding volatility of debt market, it seems to be in most cases of analysis uncorrelated to news. Interesting implications emerge from this paper namely for the asset pricing and risk management.

The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis

This paper investigates whether exchange rate pass-through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass-through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits.

The Determinants of Sovereign Bond Yield Spreads in the EMU

The Determinants of Sovereign Bond Yield Spreads in the EMU