Rising state budget gaps could rein in the US rebound

2020 ◽  
Keyword(s):  
Federal Reserve ◽  
Behavioural Change ◽  
Bond Market ◽  
Municipal Bonds ◽  
Municipal Bond ◽  
State Budget ◽  
Content Type ◽  
Us States ◽  
Fiscal Constraints ◽  
The Us

Significance Fiscal constraints limit the ability of US states to practise counter-cyclical fiscal policy, and some states and municipalities had budgetary troubles even before the pandemic. Pension deficits are a particular problem. The USD500bn Federal Reserve (Fed) programme to buy states' municipal bonds has been barely used. Impacts The Biden administration will be tested in trying to get the Senate, which is likely to remain Republican, to provide money to states. If a city files for bankruptcy, contagion could spread statewide and, more broadly, the US municipal bond market could be disrupted. Even if a vaccine is widely distributed in 2021, recovery will remain fragile as a result of permanent scarring and behavioural change.

Mixed bond market moves raise policy-tightening risks

2018 ◽  
Keyword(s):  
Federal Reserve ◽  
Yield Curve ◽  
Emerging Market ◽  
Bond Market ◽  
Bond Markets ◽  
Short Term ◽  
Industrial Firms ◽  
Content Type ◽  
The Us ◽  
Equity Funds

Significance Its two-year equivalent, which is more sensitive to US monetary policy, has risen faster, as expectations have increased that the US Federal Reserve (Fed) will raise rates at least twice more this year. The gap between ten- and two-year yields is the narrowest since 2007, suggesting that bond markets expect aggressive short-term policy tightening to dampen growth and inflation in the longer term. Impacts The VIX Index, which anticipates S&P 500 equity volatility, is settling near its three-year average of 15, having touched 50 in February. The dollar has risen by nearly 2% since April 16 despite bearish bets continuing -- suggesting that its slump may have run its course. The ‘search for yield’ will draw investors to emerging market bond and equity funds; 2018 inflows so far are nearing 73 billion dollars. The US yield curve is close to inversion, traditionally signposting recession, but the backdrop of ultra-low rates obscures the outlook. US industrial firms including Caterpillar report solid first-quarter earnings but warn of already teaching a peak, worrying investors.

Does financial advisor quality improve liquidity and issuer benefits in segmented markets? Evidence from the municipal bond market

2018 ◽  
Vol 30 (4) ◽  
pp. 440-458
Author(s):  
Kenneth Daniels ◽  
Jack Dorminey ◽  
Brent Smith ◽  
Jayaraman Vijayakumar
Keyword(s):  
Bond Market ◽  
Current Data ◽  
Financial Advisors ◽  
Municipal Bond ◽  
High Quality ◽  
Regression Estimate ◽  
Content Type ◽  
Financial Advisor ◽  
Revenue Bonds ◽  
The Impact

Purpose Using a unique sample of about 563,000 competitively bid municipal revenue bonds with financial advisors issued during the period 1998–2012, the purpose of this paper is to examine the role and influence of financial advisor quality in the municipal bond market. Design/methodology/approach The authors use a sample of about 563,000 competitively bid municipal revenue bonds with financial advisors issued during the period 1998–2012. The authors estimate a selection model where the authors identify the factors leading to the selection of a high-quality financial advisor. The authors then, using the inverse mills ratio from the first regression, estimate the association of high-quality advisor (and other factors) with the cost of borrowing. Findings The results suggest that high-quality financial advisors provide a credible signal to market participants about issue and issuer quality. This signal translates to a greater number of bids for issues that use high-quality financial advisors, resulting in improved liquidity and lower borrowing costs for these issues. The results also show that the beneficial effects obtained by using higher quality financial advisors are prevalent across all categories of issues such as for refunding and non-refunding issues, and for both insured and non-insured issues. The benefits are also generally observed for issues of most size categories. The results also suggest that the passage of the Dodd–Frank Act requiring mandatory registration of financial advisors and enhanced scrutiny has only increased the benefits to issuers from using higher quality financial advisors. Originality/value This paper differs from previous research in several important ways. First, the study is, to the authors’ knowledge, the first study that explores the relationship between financial advisor quality and liquidity in the municipal sector. The authors show using higher quality financial advisors enhances liquidity for the issues by attracting a significantly large number of bids. Second, the sample is exclusively comprised of competitively bid revenue issues all of which rely on financial advisors. This enables us to examine more unambiguously the influence of financial advisor quality, without the confounding effects of issues without financial advisors. Third, time coverage (1998–2012) and size of the sample (roughly 563,000 bond issues) enables us to conduct varied sub-sample analyses with greater power since the resulting sub-sample partitions themselves are of very large size. This provides better and additional insights into the role of financial advisor quality. The more current data when compared to prior research enables us to examine the impact of financial advisor quality inter-temporally with special attention devoted to the period after passage of the Dodd–Frank Act.

Political sensitivity and government oversight in the US corporate bond market: evidence from federal contractors

2020 ◽  
Vol 20 (7) ◽  
pp. 1173-1189
Author(s):  
Karen Ann Craig ◽  
Brandy Hadley
Keyword(s):  
Fixed Effects ◽  
Bond Market ◽  
Cost Of Debt ◽  
The Political ◽  
Yield Spreads ◽  
Content Type ◽  
Government Oversight ◽  
Increased Risk ◽  
The Us ◽  
Government Contractors

Purpose This paper aims to investigate the political cost hypothesis and the effects of political sensitivity-induced governance in the US bond market by using yield spreads from bonds issued by a diverse sample of US government contractors. Design/methodology/approach Fixed effects regression analysis is used to test the relation between the political sensitivity of government contractor firms and their cost of debt. Findings Results illustrated that government contractors with greater political sensitivity are associated with larger yield spreads, indicating that bondholders require a premium when firms endure the costs of increased political oversight and the threat of outside intervention, reducing the certainty of future income. However, despite the overall positive impact of political sensitivity on bond yield spreads on average, the authors found that the additional government oversight is associated with lower spreads when the firm is facing greater repayment risk. Practical implications Despite the benefits of winning a government contract, this paper identifies a direct financial cost of increased political sensitivity because of additional firm oversight and potential intervention. Importantly, it also finds that this governance is valued by bondholders when faced with increased risk. Firms must balance their desire for government receipts with the costs and benefits of dependence on those expenditures. Originality/value This paper contributes to the literature in its exploration of political sensitivity as an important determinant of the cost of debt for corporate government contractors. Specifically, the authors document a significant risk premium in bond pricing because of the joint effects of the visibility and importance of government contracts to the firm.

Leading central banks mould investor sentiment

2015 ◽  
Keyword(s):  
Central Bank ◽  
Federal Reserve ◽  
Developing Economies ◽  
Investor Sentiment ◽  
Oil Prices ◽  
Central Banks ◽  
Euro Crisis ◽  
Content Type ◽  
The Us ◽  
Country Specific

Significance In the worst start to a year for US equities since 2008, the benchmark S&P 500 index fell 0.7% during the week ending January 10. December's employment report showed US non-farm payrolls rising by a robust 252,000, but average hourly earnings declined, accentuating deflationary fears. The dollar continued to strengthen against the euro on concerns about a possible euro crisis over Greece and the introduction of sovereign QE by the ECB. With the US Federal Reserve preparing to raise rates, investor sentiment remains fragile. Impacts The tug-of-war between central bank largesse and country-specific, geopolitical and economic risks will become more intense. Markets will focus on renewed fears of 'Grexit' and on concerns about German opposition to an ECB sovereign QE programme. The relentless oil prices slide, exacerbated by the dollar's strength, will put further strain on EM assets. The ruble is likely to weaken further, increasing the scope for contagion to other developing economies.

Central Europe external risks still outweigh internal

2017 ◽  
Keyword(s):  
Mutual Funds ◽  
Central Europe ◽  
Federal Reserve ◽  
Political Crisis ◽  
Checks And Balances ◽  
Content Type ◽  
Political Risks ◽  
The Us ◽  
Asset Purchases ◽  
Law And Justice

Significance Investors are brushing off mounting political risks in Poland despite an erosion of democratic checks and balances under the nationalist Law and Justice (PiS) government. In Romania, despite the rapidly escalating political crisis, the leu has strengthened slightly against the euro since the start of this year, since when the yield on benchmark ten-year Romanian local bonds has risen by 25 bps to 3.6%. This is still significantly below the 5% level before the ‘taper tantrum’ in mid-2013, which stemmed from the unexpected decision by the US Federal Reserve (Fed) to end its asset purchases. Impacts After post-US election outflows, EM mutual funds are once again enjoying sizeable inflows, with EM debt funds reaching a four-month high. Some of the strain on EM currencies will be relieved by the 2.5% fall in the dollar index against a basket of its peers since end-December. Smaller export-led CEE economies will benefit from factory orders in Germany rising in December at their fastest pace in 30 months.

Prospects for emerging economies to end-2016

2016 ◽  
Keyword(s):  
Fiscal Policy ◽  
Exchange Rates ◽  
Emerging Economies ◽  
Federal Reserve ◽  
Emerging Market ◽  
Commodity Prices ◽  
Content Type ◽  
Political Risks ◽  
The Us ◽  
Growth Prospects

Subject Prospects for emerging economies to end-2016. Significance Despite political risks causing bouts of volatility in countries such as Brazil and Turkey, emerging market (EM) growth prospects have improved moderately and asset prices have rebounded after the turbulence of early 2016. More stability in exchange rates has helped, with the US Federal Reserve (Fed) holding off raising rates. The rebound in commodity prices has been supportive, too, together with receding concerns about China's slowdown. Some countries have also eased fiscal policy to reduce social tensions risks.

Further Mexico rate hikes likely in 2018

2017 ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Federal Reserve ◽  
Content Type ◽  
The Us ◽  
Wage Increases

Subject Monetary policy moves. Significance The Bank of Mexico (Banxico) increased its target interest rate by 25 basis points, to 7.25%, on December 14, responding to a similar move by the US Federal Reserve (Fed) the previous day. The hike was the first to be taken under new Governor Alejandro Diaz de Leon and pushes the rate to its highest level since March 2009. Impacts Tighter monetary policy will weigh on growth in 2018 and may hit the PRI’s electoral prospects. More expensive credit will hit consumption moderately, as interest rates remain relatively low by historical standards. The possibility of wage increases edging up will feed inflationary expectations.

Indonesia will avoid economic crisis

2018 ◽  
Keyword(s):  
Monetary Policy ◽  
Federal Reserve ◽  
Presidential Election ◽  
Direct Investment ◽  
Current Account Deficit ◽  
Economic Nationalism ◽  
Content Type ◽  
Finance Minister ◽  
Global Trend ◽  
The Us

Subject Indonesia's economic headwinds. Significance Finance Minister Sri Mulyani Indrawati last week said the US Federal Reserve (Fed) should be careful about how its policies affect emerging markets. Tightening US monetary policy and a global trend of trade protectionism is straining Indonesia’s currency and current account deficit. President Joko ‘Jokowi’ Widodo will be eager to demonstrate that he can handle Indonesia’s economic challenges ahead of the presidential election in April 2019. Impacts Sri Mulyani’s message to the Fed is unlikely to have much traction in Washington. The force of economic nationalism will hinder Indonesia’s efforts to court more foreign direct investment. US trade reprisals on Indonesia would damage Washington-Jakarta diplomatic ties.

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