Determinants of sub-sovereign bond yield spreads – The role of fiscal fundamentals and federal bailout expectations

This paper investigates how bailout expectations affect the extent to which yield spreads for bonds issued by sub-sovereign entities within fiscal federations price in fundamentals related to default risk. The question is analysed both across and within federations using a novel dataset for sub-sovereign governments that includes Australian states, Canadian provinces, Swiss cantons, German Länder, US states, Spanish communities, and Indian states. The paper finds that sub-sovereign debt and deficit levels relative to GDP are important drivers of sub-sovereign spreads. However, the weight assigned by financial markets to fundamentals when pricing sub-sovereign bonds is reduced when the institutional set-up of the federation allows for bailouts. Moreover, within federations, the market’s expectation of a federal bailout and the capacity of the federal government to provide support to the weaker members of the federation similarly affect the extent to which fundamental factors are priced into spreads. The paper shows that the positive link between debt and risk premia tends to break down when sub-sovereign government debt rises above certain thresholds. This could reflect the market’s expectation of a federal bailout as fundamentals deteriorate. Additionally, larger sub-sovereign entities tend to pay higher premia as fundamentals worsen which could be linked to the limited capacity of the federal government to provide support as the size of the expected bailout increases. A pattern of rising risk premia as fundamentals worsen is also found for sub-sovereign entities when the central government faces borrowing constraints.     

德国地方政府债券市场的发展与启示

德国地方政府债券市场起步较早,发展较为成熟,这对巩固德国地方政府财政发挥了重要作用。文章介绍了德国地方政府债券市场的发展特点,及其在形成对政府举债市场化方面发挥的作用,并总结了其对于正处于起步阶段的我国地方政府债券市场发展可资借鉴的经验。     

Sovereign bond market reactions to no-bailout clauses and fiscal rules – The Swiss experience

We analyse the effects of a credible no-bailout policy and stringent sub-national fiscal rules on the risk premia of Swiss sub-national government bonds in the period from 1981 to 2007. In July 2003, the Swiss Supreme Court decided that the canton of Valais is not liable for municipal debt. This landmark decision reduced cantonal risk premia by about 26 basis points and cut the link between cantonal risk premia and the financial situation of the municipalities that existed before. The result demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor. Additionally, strong and credible balanced budget rules reduce risk premia.     

Sovereign bond yield spreads: A time-varying coefficient approach

We study the determinants of sovereign bond yield spreads across 10 EMU countries between Q1/1999 and Q1/2010. We apply a semiparametric time-varying coefficient model to identify, to what extent an observed change in the yield spread is due to a shift in macroeconomic fundamentals or due to altering risk pricing. We find that at the beginning of EMU, the government debt level and the general investors’ risk aversion had a significant impact on interest differentials. In the subsequent years, however, financial markets paid less attention to the fiscal position of a country and the safe haven status of Germany diminished in importance. By the end of 2006, two years before the fall of Lehman Brothers, financial markets began to grant Germany safe haven status again. One year later, when financial turmoil began, the market reaction to fiscal loosening increased considerably. The altering in risk pricing over time period confirms the need of time-varying coefficient models in this context.     

地方政府隐性债务与城投债定价

由于1994年《预算法》限制了中国地方政府凭借自身信用发行政府债券的能力,地方政府通过设立融资平台的方式发行了大量城投债券。虽然城投债被普遍认为是含有政府隐性担保的,但隐性担保主体认定尚未有共识。本文通过加总地方政府下属融资平台有息债务总额的方法,构建地方政府隐性债务负担率指标,并通过分析地方政府隐性债务负担率对城投债一二级市场信用利差的影响,进一步探索市场对城投债隐性担保责任主体的认定。研究发现,政府隐性债务负担率高的地方城投债信用利差偏高,并且这种影响随政策以及宏观形势而变化。自滇公路违约函事件后,投资者在城投债定价中开始普遍关注地方政府隐性债务负担率的信息;而在43号文明确了地方政府债务置换措施后,省级政府的隐性债务负担率开始成为城投债定价的重要影响因素。这说明投资者认可的地方隐性担保的责任主体是随时间变动的。     

社会信用、刚兑信仰与地方政府隐性债务

防范化解地方政府隐性债务风险是当前我国亟待解决的重要问题。本文基于2007年至2019年293个地级市面板数据,研究社会信用对地方政府隐性债务的影响。我们发现:(1)社会信用下滑会导致地方政府隐性债务规模提高和融资成本上升。(2)社会信用通过影响市场金融资源供给和政府债务需求进而影响隐性债务规模与融资成本,但上述机制在有无“刚兑信仰”情境下存在差异。(3)对比新《预算法》和“43号文”出台前后社会信用对隐性债务影响的异质性发现,债务管制显著提高了融资平台的市场化程度。虽然政策前期金融市场更多呈现出一种观望态度,但违约事件打破了金融市场对地方政府隐性债务的“刚兑信仰”,隐性债务发行受到的市场约束力度显著增强。本文对更好地认识地方政府隐性债务风险、理解当前债务治理措施的有效性以及未来如何通过完善社会信用体系建设化解地方政府隐性债务风险具有启示意义。     

Macroeconomic imbalances,financial stress and fiscal vulnerability in the euro area before the debt crises: A market view

This paper tries to identify the macro-financial imbalances that exposed the euro area countries to fiscal stress before the outbreak of the European debt crises. Contrary to conventional wisdom that interprets fiscal stress in terms of fiscal sustainability, we focus on short-term fiscal vulnerability as reflected by the conditions of debt refinancing in the sovereign bond markets. We find that market-based indicators capturing risk perceptions of sovereign debts have been influenced by the indicators defined in the European Macroeconomic Imbalance Procedure (MIP) and by variables of financial vulnerability. When pricing the risk of sovereign bonds, the holders of government debts take into account not only the macroeconomic imbalances but also factors such as banking distress, corporate bond risk, liquidity risks in the interbank market or the volatility of stock prices.     

No-bailout event and local bank-government nexus in China

We examine the impact of a no-bailout event on the local bank-government nexus in China in the context of a multi-level fiscal federalism. Using a difference-in-difference (DID) model, we find that the no-bailout event leads to a tighter relationship between the issuance premia of negotiable certificates of deposit (NCDs) by local banks and the fiscal strength of local governments. It also induces a higher divergence of issuance premia among cities with different fiscal strengths and local banks of different sizes. The divergence is weaker among province-level banks. We also find that the spread of urban construction investment bonds (UCIBs) decreases more in fiscally stronger cities, while that of provincial government bonds declines more in fiscally weaker provinces. The market discipline on governments is strengthened at the city level but weakened at the province level. It suggests that the decline of implicit guarantee, especially that of higher-level governments, is an essential channel for the changes of local bank-government nexus after the event.     

What is the risk of European sovereign debt defaults? Fiscal space,CDS spreads and market pricing of risk

We estimate the pricing of sovereign risk for fifty countries based on fiscal space (debt/tax; deficits/tax) and other economic fundamentals over 2005–10. We focus in particular on five countries in the South-West Eurozone Periphery, Greece, Ireland, Italy, Portugal and Spain. Dynamic panel estimates show that fiscal space and other macroeconomic factors are statistically and economically important determinants of sovereign risk. However, risk-pricing of the Eurozone Periphery countries is not predicted accurately either in-sample or out-of-sample: unpredicted high spreads are evident during global crisis period, especially in 2010 when the sovereign debt crisis swept over the periphery area. We match the periphery group with five middle income countries outside Europe that were closest in terms of fiscal space during the European fiscal crisis. Eurozone Periphery default risk is priced much higher than the matched countries in 2010, even allowing for differences in fundamentals. One interpretation is that these economies switched to a “pessimistic” self-fulfilling expectational equilibrium. An alternative interpretation is that the market prices not on current but future fundamentals, expecting adjustment challenges in the Eurozone periphery to be more difficult for than the matched group of middle-income countries because of exchange rate and monetary constraints.     

Acquisitions and the cost of debt: Evidence from China

A large body of literature has examined the effect of mergers and acquisitions (M&As) on firm valuation, and generally find that M&As reduce acquirers' shareholder value. However, relatively little is known about the effect of M&As on the pricing of corporate debt by debtholders, especially for firms in less developed countries. Using a sample of Chinese listed firms with outstanding bonds from 2007 to 2020, we find that the cost of debt is lower for acquirers than for non-acquirers, and that the effect of acquisitions in reducing cost of debt is more pronounced for firms from provinces with less developed markets, for private firms, and for firms undertaking cross-province acquisitions. Our results are robust to a series of robustness checks that address various endogeneity concerns, including the use of a matched-sample approach, the use of the Heckman two-stage model and a change analysis, the control for acquirers' pre-acquisition bond yield spread, and the exclusion of acquisitions of publicly listed targets. Our analyses of provincial institutional factors show that the relationship between M&As and cost of debt is moderated by government relations to market, private economy development, and the development of market intermediaries and legal environment. We further document that acquirers have lower default risk during the post-acquisition period because of a coinsurance effect, and that acquirers attract more analyst following and investors after acquisitions. Overall, our results indicate that acquisitions can reduce cost of debt through reducing firms' default risk and information risk, and that institutional factors matter for the effect of M&As on the cost of debt.     

Understanding Housing Market Volatility

The Campbell–Shiller present value formula implies a factor structure for the price–rent ratio of housing market. Using a dynamic factor model, we decompose the price–rent ratios of 23 major housing markets into a national factor and independent local factors, and we link these factors to the economic fundamentals of the housing markets. We find that a large fraction of housing market volatility is local and that the national factor has become more important than local factors in driving housing market volatility since 1999, consistent with the findings in Del Negro and Otrok (2007). The local volatilities mostly are due to time variations of idiosyncratic housing market risk premia, not local growth. At the aggregate level, the growth and interest rate factors jointly account for less than half of the total variation in the price–rent ratio. The rest is due to the aggregate housing market risk premium and a pricing error. We find evidence that the pricing error is related to money illusion, especially at the onset of the recent housing market bubble. The rapid rise in housing prices prior to the 2008 financial crisis was accompanied by both a large increase in the pricing error and a large decrease in the housing market risk premium.     

论我国地方财政运行中的道德风险问题

在我国财政分权改革中,地方政府逐渐成为相对独立的公共实体。由于我国现行体制下,上级政府对下级政府、中央政府对地方政府的隐性财政担保关系缺乏有效的风险约束机制,引致了地方财政运行中道德风险蔓延,提高了我国的财政风险。防范地方政府道德风险需构建风险约束机制,并在改革进程中进一步完善财政管理体制。     

Normalizing the Central Bank's Balance Sheet: Implications for Inflation and Debt Dynamics

We explore the effects of reducing the overall size of the central bank's balance sheet and lowering its maturity structure. To do so, we consider an environment where fiscal policy is traditionally passive and the central bank follows the Taylor principle. In addition, the monetary authority has also explicit size and compositional rules regarding its balance sheet. Agents in this economy face limited commitment in some markets and government bonds can be used as collateral. When short- and long-term public debt exhibit premia, changes in the central bank's balance sheet have implications for long-run inflation and real allocations. To ensure a unique locally stable steady state, the central bank should target a low enough maturity composition of its balance sheet. In our numerical exercise, calibrated to the United States, we find that long-term debt holdings by the central bank should be less than 0.5 times of their short-term positions. Moreover, the process of balance sheet normalization should aggressively respond to the total debt issued in the economy relative to its target. These findings depend on the degree of liquidity of long-term bonds. The more liquid long-term bonds are, the lower is the value of the composition threshold and the parameter space consistent with unique and stable equilibria is smaller. In addition, we consider a modified Taylor rule that takes into account the premium. Such a rule increases the prevalence of multiplicity of steady states and delivers lower welfare. Thus, we argue that the traditional Taylor rule is appropriate for managing interest rates in the presence of premia.     

地区竞争、支出责任下移与地方政府债务扩张

地方政府债务过度扩张容易引发系统性经济风险。本文通过一个地方政府举债行为理论模型,分析了政府间共同事权的支出责任下移、竞争性地区的举债行为对地方政府债务规模的影响。在此基础上构建空间面板计量模型,利用279个地级市数据进行回归分析,结果表明:地方政府债务扩张是支出责任下移与标尺竞争机制共同驱动的结果;政府间支出责任下移造成的财政压力是地方政府被动负债的重要原因;地方政府间的标尺竞争使其在举债融资行为上表现为明显的策略模仿;各地区在债务扩张的主因上存在异质性,东部地区政府债务的增加主要是地区间竞争的结果。这意味着化解地方政府债务风险不仅应规范政府间财政支出责任划分,更重要的是完善地方政府的政绩考核体系和违规举债的问责机制。     

地方政府债券置换对银行信贷及货币供给的影响

通过构建基于商业银行资产负债结构的地方债置换分析框架,研究表明,地方债置换将通过商业银行资产结构在贷款与债券之间的配置调整影响货币供给,它将使银行可贷资金增加,并导致贷款规模的变化,在贷款创造存款的信用放大机制下,引起货币供应量的变化,进而造成货币政策的扩张(收缩).贷款市场的供求弹性将决定地方债置换的扩张效应或收缩效应.在经济增长放缓、银行为弥补持有地方债收益下降、地方债纳入货币政策工具的抵押品和质押品范围的情况下,地方债置换具有货币政策扩张效应.为减少地方债对金融市场的冲击,央行需密切监测商业银行资金运用情况,提高货币政策操作的针对性,并加强同财政政策的协同配合.     

Sovereign default risk and state-dependent twin deficits

This paper analyzes the impact of the government debt-to-GDP ratio on the correlation of the fiscal balance and the current account. Above a government debt-to-GDP ratio of 90 percent the correlation of the two balances decreases by 0.16 in a sample of 12 euro area countries and by 0.17 for Greece, Ireland, Portugal and Spain. This paper develops a small open economy model with defaultable government debt and riskless international capital markets to explain the empirical evidence of a state-dependent change in the correlation. In the model high public debt-to-GDP ratios raise sovereign risk premia as the default probability increases, leading to higher uncertainty about future taxes. In this case precautionary savings of households increase and partially compensate current account deficits that result from fiscal deficits. The increase in households' saving reduces the correlation of the two balances by the same magnitude as documented in the data. The model calibrated to Greece matches further business cycle moments and the empirical default frequency.     

Retail Investors and the Trading of Treasury Securities

I analyze implicit transaction costs of trading government debt securities on the Spanish stock exchanges (SE) electronic trading system. The SE’s multilateral system is used mainly as an outlet for retail investors to liquidate Treasury accounts positions before maturity. I compare identical Treasury security trades on the same day in two different markets: the SE and the interdealer market. By analyzing these yield spreads I learn more about the behavior of the markdowns included in the retail prices from the institutional prices. I find evidence that these yield premia depend on traditional features to explain wholesale market liquidity premia.

The world price of sentiment risk

This paper examines whether sentiment can be considered a priced source of risk on international financial markets. We investigate whether residual sentiment is rewarded with a risk premium if added to a model with macroeconomic fundamentals and analyze the time-variation of the respective risk premia. The analysis is performed in the framework of a conditional multiple-beta pricing model and focusses on the excess returns of the G7 stock markets in the period from February 1999 to February 2012. The obtained results indicate that sentiment indeed earns a significant risk premium of around 2% p.a. on the considered markets.     

Sovereign risk premia: The link between fiscal rules and stability culture

There is a growing empirical literature studying whether permanent constraints on fiscal policy, such as fiscal rules, reduce sovereign risk premia. Nevertheless, it remains an open question whether these rules are effective genuinely or just because they mirror fiscal preferences of politicians and voters. In our analysis of European bond spreads before the financial crisis, we shed light on this issue by employing several types of stability preference related proxies. These proxies refer to a country's past stability performance, government characteristics and survey results related to general trust. We find evidence that these preference indicators affect sovereign bond spreads and dampen the measurable impact of fiscal rules. Yet, the interaction of stability preferences and rules points to a particular potential of fiscal rules to restore market confidence in countries with a historical lack of stability culture.     

Why do firm fundamentals predict returns? Evidence from short selling activity

This study uses short selling activity to test whether the relation between fundamentals and future returns is due to rational pricing or mispricing. We find that short sellers target firms with fundamental performance below market expectations. We also show that short selling activity reduces the return predictability of fundamentals by speeding up the price adjustments to negative fundamental signals. To further investigate whether the returns earned by short sellers reflect rational risk premia or mispricing, we exploit a natural experiment, namely Regulation of SHO, which creates exogenous shocks to short selling by temporarily relaxing short-sale constraints. Evidence from the experiment confirms that the superior returns to short sellers result from exploiting overpricing. Overall, our study suggests that the return predictability of fundamentals reflects mispricing rather than rational risk premia.