The Competitive Impact of Commercial Bank Underwriting on the Market for Municipal Revenue Bonds

This paper examines the impact of commercial bank entry in the market for municipal revenue bonds. We show that issues underwritten by commercial banks have lower underwriter spreads but not lower yields relative to issues underwritten by nonbank investment firms. In particular, this is more significant for non-investment-grade bonds underwritten by commercial banks. Our results are consistent with the interpretation that bank entry has resulted in increased competition in the municipal revenue bond market and that the lower yields observed for bank-underwritten commercial bonds may be due to banks having private information. Overall, our results suggest that policy changes leading to the relaxation of restrictive provisions concerning bank underwriting of municipal revenue bonds have had beneficial effects.     

2013年中国债券市场发展报告

2013年中国债券市场收益率曲线平坦化上行,高评级信用利差收窄,信用债等级间利差拓宽。展望2014年,资金面仍将维持紧平衡,利率债供给压力将小幅增加,国债收益率曲线小幅陡峭化下移,下半年市场表现好于上半年;在信用债市场,随着下半年市场收益率水平下行和信用债供给的增加,高评级产品利差将会拓宽;中低评级债券受信用风险事件和交易所重启IPO影响,等级间利差也将拓宽。     

Does the Quality of Financial Advice Affect Prices?

Using a large data sample of 58,562 new municipal issues covering the period from 1984 to 2002, we examine whether the quality of advice provided by a financial advisor affects new issue interest costs. We find that higher‐quality financial advisors are associated with statistically significant decreases in new issue yields. The effect of advisor quality on yields is more pronounced for revenue, negotiated, and opaque bond issues than for general obligation and competitively sold issues. However, issuers of revenue or negotiated bonds are more likely to choose a low‐quality advisor.     

政府债券、宏观效应与政策调节--基于规模和流动性双重视角的DSGE效应分析

本文基于政府债券规模和流动性的双重视角,构建动态随机一般均衡模型,通过理论分析和数值模拟,研究二者对实体经济发展和金融风险变量的影响。研究显示:政府债券规模的增加促进了投资,刺激了产出和劳动供给,但过度扩张对实体经济也带来"挤占投资"和物价上升、消费下降等负面效应,同时通过债券作为金融资产的特性向金融部门蔓延并形成金融风险集聚;政府债券流动性增强一定程度上刺激了投资,促进了物价稳定,但也存在"挤占消费"和引起经济波动等负面效应;而政府债券流动性的提升有利于缓释金融风险,对实体经济长期可持续发展有益,但流动性过高也会带来系统性金融风险集聚。本文从促进政府债券一级市场和二级市场协同发展、总量和结构合理匹配、政府债券与实体经济有机契合、政府债券流动性管理与金融供给侧密切衔接等方面提出政策建议。     

The demand effect of yield-chasing retail investors: Evidence from the Chinese enterprise bond market

Enterprise bonds with higher demand of retail investors are traded at significantly higher prices in the exchange market than the same bonds traded by institutional investors in the interbank market in China. The price difference is higher for bonds with higher yield to maturity, lower supply, and higher demand exposure to retail investors. Our results suggest that risky bonds can be priced significantly higher due to the demand of yield-chasing investors and a sudden negative demand shock can generate a sharp decrease in bond values. The demand and supply effects are stronger for bonds with higher duration due to the limited risk-sharing capacity of risk-averse arbitrageurs.     

Pricing effects in Fannie Mae agency bonds

As a government-sponsored enterprise, Fannie Mae enjoys certain advantages over other firms. The extent of these advantages, while widely discussed, have not yet been fully quantified. This paper empirically examines the returns to Fannie Mae general obligation bonds under the assumptions of the Arbitrage Pricing Theory. The model provides an explicit method for estimating the risk premium on Fannie Mae bonds. The results indicate that liquidity and tax effects are important in explaining the returns to Fannie Mae bonds. The results also indicate that the market does not incorporate changes in the riskiness of the mortgage market into the returns on Fannie Mae bonds. The results provide support for the contention that Fannie Mae, as a government sponsored enterprise, enjoys a significant advantage over other firms in the capital market.     

Sovereign risk premiums in the European government bond market

This paper provides a study of bond yield differentials among EU government bonds on the basis of a unique data set of issue spreads in the US and DM (Euro) bond market between 1993 and 2009. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premiums which increase with fiscal imbalances and depend negatively on the issuer’s relative bond market size. The start of the European Monetary Union has shifted market attention to deficit and debt service payments as key measures of fiscal soundness and eliminated liquidity premiums in the euro area. With the financial crisis, the cost of loose fiscal policy has increased considerably.     

The lead-lag relation between the stock and the bond markets

I examine the relative informational efficiency of bonds and the underlying stocks through the lead-lag relation between their daily returns. I find that stock returns lead the returns of high yield bonds but not those of investment grade bonds, which indicates that the stock market is relatively more informational efficient than the bond market. The findings imply trading opportunities for the bonds that are highly sensitive to the release of new information. I also find that stocks detect impending defaults earlier than bonds, which implies that bond holders may have enough time to protect their capital.     

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。     

Credit Spread Changes and Equity Volatility: Evidence from Daily Data

We investigate the determinants of daily changes in credit spreads in the U.S. corporate bond market. Using a sample of liquid investment grade and high‐yield bonds, we show that both systematic bond and stock market factors as well as idiosyncratic equity market factors affect changes in the yield spread at the daily frequency. In particular, we find that increase in stock market volatility has a positive effect on changes in the spread of corporate bonds over the corresponding Treasuries beyond that captured by standard term structure variables. Our results show that there is an almost contemporaneous inverse relationship between changes in the bond yield spread and the stock return of the issuing firm.     

The Role and Impact of Financial Advisors in the Market for Municipal Bonds

Significantly more and more issuers of municipal bonds use the services of financial advisors during the bond issuance process. We investigate the benefits to issuers and market participants arising from the role of financial advisors in the issuance of municipal bonds. Using a large sample of 9,493 tax-exempt municipal bonds, we show that financial advisors have significant impact on borrowing costs, reoffering yields and underwriter gross spreads. Our results are more pronounced for revenue bonds, particularly for negotiated revenue issues. In addition, our results show significant advantages to using a financial advisor for refunding issues supporting the view that financial advisors play important roles for more complex issues. Our results are consistent with the interpretation that financial advisors provide important and useful services resulting in monitoring and information asymmetry reduction benefits accruing to issuers and market participants.      

Government contracts and US bond yield spreads: A study on costs and benefits of materialized political connections

In a 1991–2013 sample of bonds issued by US public firms, we find that the cost of debt (yield spread relative to comparable Treasuries) of suppliers to government agencies is contingent on the strategic importance of the supplier's industry. The yield spreads for strategically unimportant government suppliers are higher than for firms that are not government suppliers. If government contracts serve as tangible evidence of political connections, these higher yield spreads indicate that weaker corporate governance as a cost of political connections outweighs the benefits of said connections. For the subsample of government suppliers from strategically important industries, where the benefits of implicit bailout guarantees and revenue stability outweigh the corporate governance problems, the cost of debt is lower than for firms that are not government suppliers. The higher (lower) cost of debt for strategically unimportant (strategically important) suppliers is confined to contracting with the federal government. Our findings are robust to alternative variable and sample specifications, and to endogeneity concerns.     

Investor yield and gross underwriting spread comparisons among U.S. dollar domestic,Yankee, Eurodollar,and global bonds

The characteristics and features of domestic, foreign, Eurobonds, and global bonds differ from one another, as do their regulation. We develop regression models to compare investor yield differences that should logically exist at issuance for these bond market segments for U.S. dollar denominated bonds. Our empirical results show that, ceteris paribus, both privately placed and Rule 144A Eurodollar issues yield more than publicly placed bonds; Yankee bonds yield insignificantly more than domestic bonds; and, the bearer feature common to Eurodollar bonds is not prized enough by institutional investors for them to accept a lower yield relative to domestic or Yankee bonds. We do not find a statistically significant difference between the investor yield spread on U.S. dollar global bonds and U.S. domestic bonds, or Yankee bonds, or Eurodollar bonds. We also study underwriting costs of publicly traded bonds and find, ceteris paribus, that Eurodollar bonds are far more costly for the firm to issue than domestic bonds, Yankee bonds, or global bonds; domestic and Yankee bonds are more expensive than global bonds; and, there is no significant cost difference between domestic and Yankee bonds.     

Spectral analysis of the structure of interest rates in the Netherlands

Spectral methods are used to examine the relationships among the rates of return on financial assets observed in the Netherlands during the period 1962–1970. It is found that both the rates on short-term loans and bonds display seasonal movements, which are related to the periodic contractions of the money supply. Furthermore, there is evidence of a four-year cycle which presumably must be attributed to the cyclical tightness of monetary conditions in the Netherlands. It is concluded that the customary distinction between the money market and the capital market, and the subdivision of the latter into a market for bonds and a stock market, is empirically meaningful.     

Corporate bond liquidity and yield spreads: A review

Secondary market illiquidity is an important non-default factor affecting yield spreads. Yet, a review of the literature suggests the findings are mixed, both regarding the relative size of the default versus non-default components as well as the relative importance of liquidity premium for investment-grade and high-yield bonds. While in theory country and currency risk might affect international bonds' yield spreads, empirical findings show that international corporate bonds pricing and liquidity are generally affected by the same factors as the U.S. market. We identify several other areas of disagreement and challenges in the literature that warrant further research.     

On the Value of Municipal Bond Insurance: An Empirical Analysis

Using a large sample of municipal bond data from 2001 to 2010 in the U.S., this paper documents the time variation of the value of municipal bond insurance, estimated from the insured and uninsured bonds yield at issue differentials. We find that insured municipal bonds carry significant lower yields at issue compared to those of the equivalent uninsured bonds before 2008. However, this cost saving disappeared with the aftermath of the subprime credit crisis. We find that the supply of bonds and the level of market interest rates to have significant positive impacts on the time‐varying value of bond insurance. We also detect asymmetric response of these yield differentials to rises and declines of market interest rates. Economic intuition suggests that the value of municipal bond insurance is a function of business cycles but our tests support the contrary, which may be explained by the habitat preference of municipal bonds issues.     

Competition in the general insurance industry

Using a large sample of cross-sectional data for 1998 of companies operating in the general insurance industry we attempt to shed some light on the issue of competition in this industry. Companies offering products and services in the general insurance market are believed to trade under very competitive conditions. In order to test this widely-held claim we investigate whether firms’ pricing policies reflect competitive or monopolistic market features. Under competitive conditions companies are forced to pass on any increase in costs in prices and thus their revenues will rise pari passu should wages, underwriting costs or other expenses are increasing. By contrast, a firm operating under monopolistic competition responds to an increase in marginal and average costs by increasing price and reducing output, resulting in a less then complete pass-through in revenue; profit falls. Our study is the first, to our knowledge, to apply this research methodology to the general (casuality/liability) insurance industry. Firms in this industry generate revenue through underwriting of insurance risks and from investing their assets. As underwriting and capital markets are in general segmented (catastrophe bonds apart), our empirical approach is based on the insurance and portfolio behaviour of firms and not on an integrated view of both. Previous investigations of this kind have focussed on the banking industry. Contrary to widely held views we find that competition is less than perfect.     

Implied tax rates and the valuation of discount bonds

Discount bonds afford the investor the opportunity for capital gains. If for tax reasons the market is segmented on the demand side, investors in lower and lower tax brackets must be attracted when interest rates rise and the supply of discount bonds increases. Changes in the differential tax on capital gains and interest income also should affect relative demand. Testing these hypotheses with U.S. Treasury bond data, the implied tax rate is found to vary over time in a manner consistent with market segmentation and tax law changes.     

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.     

Modeling Sovereign Yield Spreads: A Case Study of Russian Debt

We construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring, and allows for compensation for illiquidity. Using a new and relatively efficient method, we estimate the model using Russian dollar-denominated bonds. We consider the determinants of the Russian yield spread, the yield differential across different Russian bonds, and the implications for market integration, relative liquidity, relative expected recovery rates, and implied expectations of different default scenarios.