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Growth-indexed bonds have been suggested as a way of reducing the procyclicality of emerging-market countries' fiscal policies and the likelihood of costly debt crises. Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle. In an effort to reduce such concerns, this article presents a simple way of pricing growth-indexed bonds. As a pleasant by-product, the analysis tracks the quantitative implications of an increase in the share of growth-indexed bonds in total debt, measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued.
Bond market. --- Bonds -- Prices. --- Electronic books. -- local. --- Government securities -- Developing countries. --- Inflation-indexed bonds -- Developing countries. --- Exports and Imports --- Finance: General --- Investments: Bonds --- Macroeconomics --- General Financial Markets: General (includes Measurement and Data) --- Price Level --- Inflation --- Deflation --- International Lending and Debt Problems --- Investment & securities --- Finance --- International economics --- Bonds --- Emerging and frontier financial markets --- Inflation-indexed bonds --- Asset prices --- Foreign currency debt --- Financial services industry --- Prices --- Debts, External --- United States --- Government securities --- Prices.
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This paper explores international bond spillovers using daily and intra-day data on yields on inflation-indexed bonds and associated inflation expectations for the United States, Australia, Canada, France, Sweden, Japan, and the United Kingdom. The analysis starts in 2002, by which point U.S. inflation-indexed markets were fully mature. Real bond yields are found to be closely linked across countries, with developments in U.S. markets determining around half of real foreign yields and no evidence of spillovers back to the United States. Spillovers in inflation expectations are smaller and the direction of causation is less clear.
Business. --- Income -- Econometric models. --- Monetary policy -- Econometric models. --- Banks and Banking --- Inflation --- Investments: Bonds --- Macroeconomics --- Interest Rates: Determination, Term Structure, and Effects --- General Financial Markets: General (includes Measurement and Data) --- Price Level --- Deflation --- Externalities --- Finance --- Investment & securities --- Real interest rates --- Spillovers --- Inflation-indexed bonds --- Bond yields --- Interest rates --- Bonds --- Prices --- International finance --- United States --- Bond market --- Government securities --- Inflation (Finance) --- Econometric models.
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A number of industrialized countries have recently offered inflation-indexed bonds. Some members of another group of countries that had earlier adopted more comprehensive indexation in response to high inflation have taken steps to reduce the scope of indexation in their economies. This paper surveys debt management, monetary policy, and welfare arguments on the use of inflation-indexed bonds, and relates these to the experiences of various issuers. The paper also considers some important design features of indexed bonds.
Inflation --- Investments: General --- Investments: Bonds --- Macroeconomics --- General Financial Markets: Other --- General Financial Markets: General (includes Measurement and Data) --- Price Level --- Deflation --- Investment --- Capital --- Intangible Capital --- Capacity --- Investment & securities --- Inflation-indexed bonds --- Bonds --- Consumer price indexes --- Return on investment --- Financial institutions --- Prices --- National accounts --- Price indexes --- Saving and investment --- United Kingdom
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Portfolio flows to emerging markets (EMs) tend to be correlated. A possible explanation is the role global benchmarks play in allocating capital internationally, the so-called “benchmark effect.” This paper finds that benchmark-driven investors indeed play a large role in a key segment of the market—the EM local currency government bond market—, accounting for more than one third of total foreign holdings as of end-2014. We find that the prominence of these investors declined somewhat after the May 2013 taper tantrum, but remain high. This distinction is important in understanding the drivers of EM capital flows and their sensitivity to different types of shocks. In particular, a high share of benchmark-driven investors may result in capital flows that are more sensitive to global shocks and less sensitive to country factors.
Finance: General --- Investments: Bonds --- Financial Crises --- Portfolio Choice --- Investment Decisions --- General Financial Markets: General (includes Measurement and Data) --- Investment & securities --- Finance --- Sovereign bonds --- Securities markets --- Inflation-indexed bonds --- Bonds --- Emerging and frontier financial markets --- Financial institutions --- Financial markets --- Capital market --- Financial services industry --- Romania
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This paper examines the Argentine experience with GDP-indexed warrants in order to gauge the existence of a novelty premium on new financial instruments. It develops a Monte Carlo pricing exercise to calculate the expected net present value of payments, on the basis of various forecast assumptions. The results show that the residual premium paid by these warrants over standard bonds declined significantly by about 600 basis points between December 2005 and July 2007. This suggests that financial innovation may be associated with premia, which decay reasonably fast.
Inflation-indexed bonds --- Econometric models. --- Granny bonds --- Index bonds --- Index-linked bonds --- Indexed bonds --- Inflation-linked bonds --- Inflation-protection bonds --- Bonds --- Banks and Banking --- Foreign Exchange --- Inflation --- Investments: General --- Money and Monetary Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Price Level --- Deflation --- General Financial Markets: General (includes Measurement and Data) --- Interest Rates: Determination, Term Structure, and Effects --- Monetary economics --- Macroeconomics --- Investment & securities --- Finance --- Currency --- Foreign exchange --- Currencies --- Securities --- Discount rates --- Exchange rates --- Money --- Prices --- Financial instruments --- Discount --- Argentina
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This paper seeks to revive the case for countries to self-insure against economic growth slowdowns by issuing GDP-indexed bonds. We simulate the effects of GDP-indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood that debt/GDP paths become explosive. The insurance premium would likely be small, because cross-country comovement of GDP growth rates is low and cross-country GDP growth risk is thus largely diversifiable for an investor holding a portfolio of GDP-indexed bonds. Potential obstacles to the emergence of a market for these bonds include the verifiability of GDP data, the trade-off between insurance and moral hazard, and the need for liquidity. The paper discusses institutional fixes and suggests an approach to attempting to start up a market.
Exports and Imports --- Finance: General --- Financial Risk Management --- Investments: Bonds --- International Monetary Arrangements and Institutions --- International Lending and Debt Problems --- Financial Aspects of Economic Integration --- Contingent Pricing --- Futures Pricing --- option pricing --- International Financial Markets --- General Financial Markets: General (includes Measurement and Data) --- Financial Crises --- Investment & securities --- Finance --- Economic & financial crises & disasters --- International economics --- Bonds --- Inflation-indexed bonds --- Emerging and frontier financial markets --- Financial crises --- Debt default --- Financial institutions --- Financial markets --- External debt --- Financial services industry --- Debts, External --- United States
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The debate on government debt in the context of possible reforms of the international financial architecture has thus far focused on crisis resolution. This paper seeks to broaden this debate. It asks how government debt could be structured to pursue other objectives, including crisis prevention, international risk-sharing, and facilitating the adjustment of fiscal variables to changes in domestic economic conditions. To that end, the paper considers recently developed analytical approaches to improving sovereign debt structure using existing instruments, and reviews a number of proposals--including the introduction of explicit seniority and GDP-linked instruments--in the sovereign context.
Debts, Public. --- Financial instruments. --- Capital instruments --- Financial instruments --- Legal instruments --- Negotiable instruments --- Debts, Government --- Government debts --- National debts --- Public debt --- Public debts --- Sovereign debt --- Debt --- Bonds --- Deficit financing --- Law and legislation --- Exports and Imports --- Finance: General --- Investments: Bonds --- Public Finance --- Natural Disasters --- General Financial Markets: General (includes Measurement and Data) --- Debt Management --- Sovereign Debt --- Climate --- Natural Disasters and Their Management --- Global Warming --- International Lending and Debt Problems --- Insurance --- Insurance Companies --- Actuarial Studies --- Finance --- Investment & securities --- Natural disasters --- Public finance & taxation --- International economics --- Emerging and frontier financial markets --- Inflation-indexed bonds --- Financial markets --- Financial institutions --- Environment --- Local currency debt --- External debt --- Financial services industry --- Debts, Public --- Debts, External --- United States
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