The Yield Co-movement Among Fixed Income Securities

Analysis and Discussion of the Yield Co-movement Among Fixed Income Securities
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Introduction
Corporate bonds play a crucial in the external source of finance for the firms. Similar to the other asset prices, the corporate bonds are determined by the profitability of the issuing firms and the macro-economic factors. From a broad perspective, the corporate bond market plays a crucial role in transmitting the monetary policy. The global financial crisis, which started from 2007 to 2009, greatly affected the financial markets of significant economies before the central banks intervened. Afterwards, the major economies monitored the financial markets closely while applying the relevant monetary policies to manage the liquidity level in the markets.
Since the financial market is affected by the industry factors and the macro-economic fundamentals, academicians and researchers have paid much attention to these factors. Many pieces of literature have been added to show the co-movements of different corporate bond yields. Most studies have tried to explain the co-movements of bond yields around the macro-economic news. For instance, Menahem. B., Paolo. P., and Marti. S (2009) looks at the links between the macro-economic news and the bond yields in the USA. The study finds the interaction between the variables to be drive by the fundamentals.
This study analyzes and discusses the co-movement of corporate bond yields in the USA. The five major corporate bond yields in the USA include AAA-rated, A-rated, BBB-rated, B-rated and CCC-rated. The study uses daily data during the 1997-2017 period. The sample period is divided into five sub-periods: 1997-2000, 2001-2006, 2007-2009 (Global financial crisis), 2010-2014 (Euro debt crisis) and 2015-2017 to enable a more refined analysis of the economic periods
The study uses E-views software to do graphical and numerical analysis based on the analytical framework and discussion required. The numerical analysis involves descriptive statistics and correlation coefficient analysis.
Table 1: Descriptive statistics

A

B

AAA

BBB

CCC_OR_BELOW

Mean

4.8531

9.0050

4.3185

5.6281

14.9168

Median

4.7620

8.2630

4.4120

5.6120

12.6410

Maximum

9.4820

22.7200

8.1380

10.1060

42.3480

Minimum

2.3200

5.0840

1.5060

3.1920

7.9620

Std. Dev.

1.6860

2.7961

1.6236

1.6233

5.7888

Skewness

0.1962

1.2632

0.1497

0.3069

1.4294

Kurtosis

1.9015

5.2547

1.8441

2.1905

4.7481

Jarque-Bera

62.1394

523.6294

65.1032

47.1273

512.7705

Probability

0.0000

0.0000

0.0000

0.0000

0.0000

Sum

5319.026

9869.525

4733.042

6168.349

16348.83

Sum Sq. Dev.

3112.605

8560.605

2886.658

2885.277

36693.29

Observations

1096

1096

1096

1096

1096

Source: Computed by Author using E-views Version 10
From the above table, we can discuss the following: For the A-rated bond yield, the mean value is 4.8531 with a standard deviation of 1.6860. The maximum value is 9.4820, and the minimum value of 2.3200 and the total number of observations are 1096. The B-rated bond yield has a mean value of 9.0050 with a standard deviation of 2.7961. The maximum value is 22.7200 and the minimum value of 5.0840, and the total number of observations is 1096. The AAA-rated bond yield has a mean value of 4.3185 with a standard deviation of 1.6236. The maximum value is 8.1380, and the minimum value is 1.0560, and the total number of observations is 1096. The BBB-rated bond yield has a mean value of 5.6281 and a standard deviation of 1.6233. The maximum value is 10.1060, and the minimum value is 3.1920, and the total number of observations is 1096. The CCC or Below rated bond yield has a mean value of 14.9168 with a standard deviation of 5.7888. The maximum value is 42.3480, and minimum value of 7.9620 and the total number of observations are 1096.
Graphical representation of the A-rated bond yield
Figure 1: Graphical representation of the A-rated bond yield
Source: Computed by Author using E-views Version 10
The above graph represents the outcome of A-rated bond yield from 1997 through 2017. Discussing based on the five selected sub-periods, we can state the following: during 1997-2000, the bond yield depicts a downward trending till 1999 then rises to pick at the year 2000. Thus, we can say that the A-rated bond yield is quite volatile during the sub-period. During 2001-2006, the A-rated bond yield decreases till mid-2003 then increases till mid-2006. Thus, we state that the A-rated bond yield is not quite stable during this period but rather volatile. During the 2007-2009 period, which is regarded as the global financial period, the A-rated bond yield shows a sharp decline from a peak in mid-2008. Thus, we can state that the A-rated bond yield is quite ...