Securitized banking and the run on repo

The panic of 2007–2008 was a run on the sale and repurchase market (the repo market), which is a very large, short-term market that provides financing for a wide range of securitization activities and financial institutions. Repo transactions are collateralized, frequently with securitized bonds. We refer to the combination of securitization plus repo finance as “securitized banking” and argue that these activities were at the nexus of the crisis. We use a novel data set that includes credit spreads for hundreds of securitized bonds to trace the path of the crisis from subprime-housing related assets into markets that had no connection to housing. We find that changes in the LIB-OIS spread, a proxy for counterparty risk, were strongly correlated with changes in credit spreads and repo rates for securitized bonds. These changes implied higher uncertainty about bank solvency and lower values for repo collateral. Concerns about the liquidity of markets for the bonds used as collateral led to increases in repo haircuts, that is the amount of collateral required for any given transaction. With declining asset values and increasing haircuts, the US banking system was effectively insolvent for the first time since the Great Depression.     

Collateral affects return risk: evidence from the euro bond market

Covered bonds and senior bonds are prominent securities in the euro bond market. Senior bonds are unsecured, while covered bonds are secured—backed by collateral. Our results show that the presence of collateral reduces the total risk in individual bonds by more than 70%. Compared to diversified portfolios of senior bonds, diversified portfolios of covered bonds have a significantly lower level of systematic risk. However, the fraction of systematic risk to total risk is higher for covered bonds. By decomposing the variance of bond returns, we find that around 33% of the risk in senior bonds is systematic, versus 53% in covered bonds. Both types of bonds contain instrument-specific risk.

     

Permanent trading impacts and bond yields

We analyse four years of transaction data for euro-area sovereign bonds traded on the MTS electronic platforms. In order to measure the informational content of trading activity, we estimate the permanent price response to trades. We not only find strong evidence of information asymmetry in sovereign bond markets, but also show the relevance of information asymmetry in explaining the cross-sectional variations of bond yields across a wide range of bond maturities and countries. Our results confirm that trades of more recently issued bonds and longer maturity bonds have a greater permanent effect on prices. We compare the price impact of trades for bonds across different maturity categories and find that trades of French and German bonds have the highest long-term price impact in the short maturity class, whereas trades of German bonds have the highest permanent price impact in the long maturity class. More importantly, we study the cross-section of bond yields and find that after controlling for conventional factors, investors demand higher yields for bonds with larger permanent trading impact. Interestingly, when investors face increased market uncertainty, they require even higher compensation for information asymmetry.     

Do bond yields follow the hierarchy of risk post BRRD?

With a sample of 4,065 bonds issued by 63 banks from 12 euro area countries during 2013–2017, this study investigates how introducing bail-in regulation has influenced bond yields in secondary markets, by distinguishing between non-bail-inable and different classes of bail-inable bonds. The bail-in risk premium does not follow the hierarchy of risk; it is stronger for less risky bonds. The effect on the spread between senior unsecured and non-bail-inable bonds is much higher than for subordinated bonds. Regarding subordinated bonds, the impact is higher for securities excluded from regulatory capital than for those included.     

The CDS‐bond basis

We investigate the cross‐sectional variation in the credit default swap (CDS)‐bond bases and test explanations for the violation of the arbitrage relation between cash bond and CDS contract, which states that the basis should be zero in normal conditions. The evidence is consistent with “limits to arbitrage” theories in that deviations are larger for bonds with higher frictions as measured by trading liquidity, funding cost, counterparty risk, and collateral quality. Surprisingly, we find the basis to be more negative when bond lending fee is higher suggesting that arbitrageurs are unwilling to engage in a negative basis trade when short interest on the bond is high.     

Leveraged buyouts and bond credit spreads

Recent decades have witnessed several waves of buyout activity. We find leveraged buyouts (LBOs) to be a significant concern for bondholders by showing that a) intra-industry credit spreads increase upon an LBO announcement, b) yields on bonds without event risk covenants are, on average, 21 basis points higher than those on same-firm bonds with such covenants, and c) structural models calibrated to historical LBO events imply an impact of 18–21 basis points on 10-year credit spreads. The impact is strongest in expansion periods and for bonds with maturities of 10–20 years.     

Corporate bond yields and returns: a survey

Corporate bonds offer higher yields than government bonds with similar maturity. This higher reward comes at the cost of higher risk. The question then arises of how this risk is priced into corporate bonds. This literature review provides a classification and summary of papers studying corporate bond prices and the premium they offer to investors over the return on risk-free securities. The review ranges from theoretical models to empirical determinants of corporate bond prices. A specific section is dedicated to the liquidity impact as this component has received special attention.

     

Liquidity and price pressure in the corporate bond market: evidence from mega-bonds

Larger bonds offer greater liquidity, which should reduce their yields. A simple way for firms to reduce financing costs is to sell bonds with large face values. We find that mega-bonds are more liquid than smaller bonds. However, offering yield spreads on mega-bonds are not lower and are higher than spreads of bonds issued by similar companies. The discount applied to large new issues is consistent with price pressure effects that are also present in the secondary market prices of the issuing firm's existing bonds. Our results suggest a hidden cost to issuing very liquid bonds.     

Linking wealth and labour income with stock returns and government bond yields

In this paper, I assess the predictive ability of the ratio of asset wealth to labour income for both stock returns and government bond yields. Using data for 16 Organization for Economic Co-operation and Development (OECD) countries, I show that when the wealth-to-income ratio falls, investors demand a higher stock risk premium. A similar link can be found for government bond yields when agents behave in a non-Ricardian manner or see government bonds as complements for stocks. In contrast, when investors display a Ricardian behaviour or perceive stocks and government bonds as good substitutes, a fall in the wealth-to-income ratio is associated with a fall in future bond premium.     

Uncertain inflation,exchange rates,and bond yields

The yields on international bonds are affected by exchange rate risk and country risk, in addition to factors such as default and duration that are relevant in the pricing of domestic bonds. This paper constructs a theory of bond yields in a single period framework, with the risk of nominal bonds being endogenous to the model. The behaviour of the monetary authority is modelled explicitly and is shown to be a crucial determinant of the risk of nominal bonds. A distinction is made between the risk of default in the usual sense, and the risk of being paid in currency which is worth less in real terms, with the type of risk that is relevant in a particular case depending on the monetary policy followed. The implications of results for exchange rate risk are also explored in a world where Purchasing Power Parity holds.     

Investor behaviour and reaching for yield: Evidence from the sterling corporate bond market

We provide evidence on how corporate bond investors react to a change in yields, and how this behaviour differs in times of market‐wide stress. We also investigate ‘reaching for yield’ across investor types, as well as providing insights into the structure of the corporate bond market. Using proprietary sterling corporate bond transaction data, we show that insurance companies, hedge funds and asset managers are typically net buyers when corporate bond yields rise. Dealer banks clear the market by being net sellers. However, we find evidence for this behaviour reversing in times of stress for some investors. During the 2013 ‘taper tantrum’, asset managers were net sellers of corporate bonds in response to a sharp rise in yields, potentially amplifying price changes. At the same time, dealer banks were net buyers. Finally, we provide evidence that insurers, hedge funds and asset managers tilt their portfolios towards higher risk bonds, consistent with ‘reaching for yield’ behaviour.     

Repo Auctions and the Market for Liquidity

What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short‐term rates. However, auction allocations affect banks' subsequent behavior in a way that is consistent with a degree of allocational and operational inefficiency. Also, large bidders appear to have better access to the interbank market than small ones. Finally, the evidence suggests that the ECB uses collateral haircuts that do not equilibrate opportunity costs.     

Complexity, concentration and contagion

This paper develops a network model of interbank lending in which unsecured claims, repo activity and shocks to the haircuts applied to collateral assume centre stage. We show how systemic liquidity crises of the kind associated with the interbank market collapse of 2007–2008 can arise within such a framework, with funding contagion spreading widely through the web of interlinkages. Our model illustrates how greater complexity and concentration in the financial network may amplify this fragility. The analysis suggests how a range of policy measures – including tougher liquidity regulation, macro-prudential policy, and surcharges for systemically important financial institutions – could make the financial system more resilient.     

Tranching and Rating

In this paper we analyse the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. We distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected default losses. We show that subdividing a bond issued against given collateral into subordinated tranches can yield significant profits under the hypothesised pricing system. Increasing the systematic risk or reducing the total risk of the bond collateral increases the profits further. The marketing gain is generally increasing in the number of tranches and decreasing in the rating of the lowest rated tranche.     

Determinants of bond tender premiums and the percentage tendered

We analyze a large sample of US corporate bond tender offers to understand what affects tender premiums as well as the percentage of bonds tendered. For the average (median) tender offer, the tender price is 5.55% (3.24%) greater than the pre-tender market price while the percentage of bonds tendered is 82.3% (94.6%). Premiums offered by firms are greater when the firm is simultaneously soliciting consents to amend restrictive covenants and when the bond has a greater number of restrictive covenants. Premiums are also greater when long-term risk-free yields are low and the yield curve is flatter – conditions where a firm might want to lock in favorable long-term rates by issuing new debt and retiring old debt. Bondholders respond to higher tender premiums by tendering a greater percentage of their bonds – a 1% increase in tender premium increases the tendering rate by approximately 9%. Bondholders also tender a greater percentage of bonds possessing less desirable characteristics such as a short remaining maturity or bonds that are simultaneously undergoing consent solicitations. Finally, we find that tender offers are easier to complete when bond ownership concentration is greater.     

A note on market efficiency,institutional practice,and economic constraints in the experience of the Canadian bond market

For many years, Government of Canada bonds with high coupons traded at much higher yields than those with lower coupons. This apparent market inefficiency virtually disappeared over a short period of time during 1993. Several events occurred in 1993 which relate to the narrowing of the spread. This paper shows the earlier yield spread to be consistent with restrictions on the trading of strip bonds. It also finds it difficult to defend the hypothesis that the higher yield spread represented unexploited profit opportunities.     

On the consistency of ratings and bond market yields

We study the consistency of the credit-risk orderings implicit in ratings and bond market yields. By analyzing errors in term structure estimates for bonds with particular ratings, we show that for significant periods, a quarter of some categories of high credit quality bonds are rated in a manner that is inconsistent with their pricing. Adjusting for economic determinants of spreads (tax, liquidity and risk premiums) and allowing for the dynamic adjustment of ratings and spreads largely eliminates the inconsistencies, however.     

The effect of bank relationships on bond spreads: Additional evidence from Japan

This study investigates the impact of bank relationships on bond spreads using data on Japanese bond-issuing firms. In doing so, it extends the existing literature, which found that bank relationships decrease bond spreads, consistent with the view that bond investors benefit from bank monitoring, but this is not the case for investment-grade bonds in the US. This study provides evidence that the influence on the yields of investment-grade bonds varies with the type of bank relationship. In this research, a main bank is defined as a bank that is not merely the top lender to a firm but also one of the ten largest shareholders, while firms that borrow money from banks but have no ties with main banks are considered to have support bank relationships. The regression results show that although main bank relationships are not systematically associated with the yields of investment-grade bonds, support bank relationships are positively associated with them. It is suggested that, even for a sample of investment-grade bonds, a specific type of bank relationship affects bond spreads and the association between them is consistent with the view that bond investors are concerned about the hold-up problem posed by banks.     

Do green financial policies offset the climate transition risk penalty imposed on long-term sovereign bond yields?

Asset valuations in high-carbon sectors face significant corrections due to climate risks. This paper specifically analyses whether markets impose a penalty on long-term sovereign bonds issued by countries facing higher climate-related transition risk while rewarding those that have implemented green financial policies to mitigate these risks. We find that higher carbon dioxide emissions and a lower sustainable development score (both proxies for transition risks) lead to an increase in long-term sovereign bond yields. However, the presence of green financial policies appears to offset this climate transition risk premium.     

央票发行对债券收益率影响的实证分析

文章通过对于央票招标日各期限央票、国债、金融债二级市场收益率变动特点的描述性统计,以及央票发行量对债券收益率影响的计量分析,实证考察了央票发行对债券市场收益率的影响效应。结果显示,央票招标日债券市场收益率波动性小于日常水平,且二级市场收益率与央票发行利率差值保持在合理波动范围内,体现了货币政策稳定利率的意图。