Sovereign Eurobond Liquidity and Yields

IMF Working Papers, May 20, 2022

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Sovereign Eurobond Liquidity and Yields

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Bibliographic details

• Authors: Daniel C Hardy
• Published: May 20, 2022
• Series: IMF Working Papers

Core findings

• Market liquidity is valuable to both investors and issuers and is a crucial factor in asset pricing.
• For Eurobonds, there is significant feedback from liquidity to pricing.
• Bid-ask spreads (used as a proxy for market liquidity) and yields are closely related to bond characteristics such as:
  • issue volume
  • time to maturity
  • the inclusion of collective action clauses
  • the jurisdiction of issuance
• Debt management offices can choose these bond characteristics in ways that have economically significant and persistent effects on both liquidity and pricing.

Implications for debt management and policy

• Instrument design (issue volume, maturity choice, inclusion of collective action clauses, and choice of jurisdiction) is a policy lever that affects market liquidity and sovereign borrowing costs.
• Adjustments to these characteristics can produce persistent changes in both bid-ask spreads and yields, implying long-term effects on debt servicing costs and market access.

Research scope and framing

• The analysis treats bid-ask spreads as a proxy for market liquidity and links liquidity measures to pricing outcomes for the Eurobond asset class.
• Emphasis is placed on actionable characteristics under the control of issuers (debt management offices) rather than purely external market factors.

Source: https://www.imf.org/en/publications/wp/issues/2022/05/20/sovereign-eurobond-liquidity-and-yields-518222

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