Liquidity premia in German government bonds

There is strong evidence that on-the-run U.S. Treasury securities trade much more liquidly and at significantly higher prices than their off-the-run counterparts. We examine if the same phenomenon is present in the German government bond market whose market structure differ markedly from that of the U.S. Treasury market. In sharp contrast to the U.S. evidence, we find that on-the-run status has only a negligible effect on the liquidity and pricing once other factors have been controlled for. Instead, the highly liquid German bond futures market, whose turnover is many times larger than in the cash market, leads to significant liquidity spillovers. Specifically, we find that bonds which are deliverable into futures contracts are both trading more liquidly and commanding a significant price premium, and that this effect became more pronounced during the recent financial crisis. JEL Classification: E43, G12, H63futures market, Government bond, liquidity, Liquidity premium

Interest Rate Sensitivities of REIT Returns

In order to identify effective interest rate proxies for equity and mortgage REITs, this study analyzes seven different interest rate proxies that have been widely used in the REIT literature. They are the monthly holding period returns on long-term U.S. government bonds and high-grade corporate bonds, the percentage changes in yields for long-term U.S. government bonds and high-yield (Baa) corporate bonds, the difference between returns on long-term U.S. government bonds and T-bill rates, the spread between yields on high-yield (Baa) corporate bonds and returns on long-term U.S. government bonds, and the spread between returns on high-grade corporate bonds and returns on long-term U.S. government bonds. The overall OLS results suggest that mortgage REITs are sensitive to all proxies, while equity REITs are significantly affected by only changes in yields on long-term U.S. government bonds and high-yield corporate bonds. The time variation paths for sensitivities indicate that all interest rate sensitivities are time specific. Overall, the changes in yields on high-yield corporate bonds (Baa) has the strongest explanatory power for returns of equity and mortgage REITs for most of the 27-year sample period (1972 through 1998).

Reduced form models of bond portfolios

We derive simple return models for several classes of bond portfolios. With only one or two risk factors our models are able to explain most of the return variations in portfolios of fixed rate government bonds, inflation linked government bonds and investment grade corporate bonds. The underlying risk factors have natural interpretations which make the models well suited for risk management and portfolio design

Analisis Pasar Obligasi Pemerintah di Indonesia

This article focused on analyze (1) Effect of the budget deficit, official foreign borrowing, certificate of Bank Indonesia (SBI), and demand of the government bonds to the issuances of the government bonds in Indonesia. (2) The influence certificate of Bank Indonesia (SBI), bond price, (Composite Stock Price Index) IHSG, and supply of the government bonds to demand of the government bonds in Indonesia. Data used time series of (I year kuartal 2004 – IV year kuartal 2011). This article use analyzer model equation of simultaneous with method of Two Stage Least Squared (TSLS). The result of research concludes that (1) the budget deficit have a significant and positive impact on supply of the government bonds, official foreign borrowing, certificate of Bank Indonesia (SBI) and demand of the government bonds significantly and negatively influence on issuances of government bonds. (2) The influence certificate of Bank Indonesia (SBI) have a significant and positive impact on demand of government bonds, IHSG and supply of the government bonds significantly and negatively on demand of government bonds in Indonesia. While the bond price is not significant and negative effect on demand of the government bonds in Indonesia

Default Risk on Government Bonds, Deflation, and Inflation

This paper analyzes the impact of deflation and inflation on the real interest rates of GBs using an overlapping generations model with the relationship between the real interest rate of GBs and the fiscal consolidation rule. We find that deflation may lower the real interest rate of GBs to the same level of public debt to capital, even if the fiscal consolidation rule is the same, as opposed to the conventional view that the real interest rate of GBs is determined independent of deflation if the Fisher equation holds. Our results are consistent with how the real interest rates of Japanese GBs react in periods of deflation. This paper also addresses the impact of fiscal inflation (i.e., monetizing all parts of the GB’s default using monetary policy). We calculate the expected fiscal inflation when the default rate in the event of fiscal consolidation is raised. The fiscal inflation may be extremely high if the extent of the required tax increase in fiscal consolidation is low. Initial inflation accelerates the expected fiscal inflation, but initial deflation suppresses it.Overlapping generations model, real interest rate, fiscal consolidation rule, default risk, fiscal inflation

Long Term Government Bonds

We study the impact of debt maturity on optimal fiscal policy by focusing on the case where the government issues a bond of maturity N > 1: Isolating these effects helps provide insight into the construction of optimal government debt portfolios. We find long bonds may not complete the market even in the absence of uncertainty, generate an incentive to twist interest rates and induce additional tax volatility compared to short term bonds. By focusing just on the issuance of long bonds we show that as well as their well known advantage in providing fiscal insurance long bonds also have less attractive features that induce additional tax volatility. In the case of long bonds, governments induce tax volatility in order to twist interest rates at maturity. This interest rate twisting effect is what makes optimal debt management models so difficult to solve computationally as the state space rapidly becomes cumbersome due to the need to keep track of promises about future tax rates. We provide an alternative institutional setup (\independent powers\) that eliminates this problem offering a simpler solution method. Introducing maturity requires making more institutional assumptions than is the case for one period bonds. In particular assumptions have to be made whether the government does or doesn't buy back each period all outstanding debt irrespective of maturity and whether long bonds pay coupons. This is important as the literature to date makes assumptions that are diametrically opposite to what is observed in practice. We show that this is an important divide as if we model optimal policy under the empirically motivated assumption that governments do not buyback bonds until maturity then long bonds induce additional tax volatility due to the existence of N period roll over cycles. These can be reduced in magnitude by the government issuing long bonds that pay coupons although because coupons reduce the duration of a bond below its maturity this does compromise the ability of long bonds to provide fiscal insurance

Is It Desirable for Asian Economies to Hold More Asian Assets in Their Foreign Exchange Reserves?—The People’s Republic of China’s Answer

The author calculates the return on the major Asian currency denominated long-term government bonds in terms of a basket of the People’s Republic of China’s (PRC) imports of goods and services, namely the real return on those assets from the PRC’s perspective. He shows that it is desirable for the PRC to substitute Asian currency denominated government bonds for US Treasury bills to maintain the purchasing power of its foreign exchange reserves.foreign exchange reserves; currency basket; asian currencies

On the financial sustainability of earnings-related pension schemes with"pay-as-you-go"financing and the role of government indexed bonds

In this paper the authors reconsider the idea of an earnings-related pension system with reserves invested in indexed government bonds as a mechanism to both ensure financial sustainability and improve security. They start by reviewing the characterization of the sustainable rate of return of an earnings-related pension system with pay-as-you-go financing. The authors show that current proxies for the sustainable rate, including the Swedish"gyroscope,"are not stable and propose an alternative measure that depends on the growth of the buffer-stock and the pay-as-you-go asset. Using a simple one-sector macroeconomic model that embeds a notional account pension system they then show how GDP indexed government bonds, if combined with the right measure for the sustainable rate of return on contributions, could be used to generate a sustainable and secure earnings-related pension system, without becoming a fiscal burden. The proposal is particularly attractive for countries considering reforms to earnings-related systems that have accumulated a large implicit pension debt. In this case, the government bonds allow the financing of this debt in a transparent way. The proposed mechanism can also facilitate the transition to a fully-funded pension system when the government bonds are allowed to be traded.Economic Theory&Research,Technology Industry,Pensions&Retirement Systems,Economic Growth,Population Policies

Determinacy of Interest Rate Rules with Bond Transaction Services in a Cashless Economy

Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless variant of their model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosant. In general, the results of Leeper (1991) are confirmed.Monetary Policy; Fiscal Policy; Government Bonds; Determinacy