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Bond yields and debt supply: new evidence through the lens of a preferred-habitat model

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  • Till Strohsal

Abstract

This paper examines the responsiveness of bond yields to changes in debt supply. The preferred-habitat theory predicts a positive relation between the term spread and relative supply of longer term debt, and that this relation is stronger when risk aversion is high. To capture this effect, a time-varying coefficient model is introduced and applied to German bond data. The results support the theoretical predictions and indicate substantial time variation: under high risk aversion, yield spreads react about three times more strongly than when risk aversion is low. The accumulated response of term spreads to a one standard deviation change in debt supply ranges between 4 and 46 basis points.

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  • Till Strohsal, 2017. "Bond yields and debt supply: new evidence through the lens of a preferred-habitat model," Quantitative Finance, Taylor & Francis Journals, vol. 17(10), pages 1509-1522, October.
    • Handle: RePEc:taf:quantf:v:17:y:2017:i:10:p:1509-1522
    DOI: 10.1080/14697688.2017.1287942
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    Cited by:

    1. Giese, Julia & Joyce, Michael & Meaning, Jack & Worlidge, Jack, 2021. "Preferred habitat investors in the UK government bond market," Bank of England working papers 939, Bank of England.
    2. Anne-Charlotte Paret & Miss Anke Weber, 2019. "German Bond Yields and Debt Supply: Is There a “Bund Premium”?," IMF Working Papers 2019/235, International Monetary Fund.
    3. Martijn Boermans & Viacheslav Keshkov, 2018. "The impact of the ECB asset purchases on the European bond market structure: Granular evidence on ownership concentration," DNB Working Papers 590, Netherlands Central Bank, Research Department.

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