Macroeconomic determinants of long-term sovereign bond yields in South Africa

Abstract

This paper seeks to analyse the impact of government debt and other macroeconomic variables on the long term bond yield for South Africa. Recent increases in the government budget deficit and its corresponding borrowing has renewed interest in understanding fiscal dynamics within the economy. The study employs both the linear and non-linear Auto-regressive distributed lag (ARDL) technique to estimate the determinants of the long-term bond yield. Our results show that the short-term interest rate is the major determinant of the long term yield in both the short-run and long-run. Government debt and the US long term yield positively impact long term bond yields both in the short-and long-run. The rate of inflation, economic growth, nominal effective exchange rate and bank credit all have negative effects on the bond yield in the long-run. Tests for non-linearity reveal that the short-term interest rate has an asymmetric relationship with the long-term bond yield. However, we only establish non-linearity between government debt and bond yields in the long-run. We suggest complementarity between monetary policy and fiscal policy, a systematic program of deleveraging and implementation of structural changes aimed at increasing production.

The Impacts of Fiscal and Macroeconomic Factors on Vietnam Government Bond Yield

“…Most of the coefficients are negative. This is in line with (Mihelja et al, 2018;Zhou, 2021). The reason for it is that based on the fisher effect, the negative association between inflation and real interest rate occurs when the nominal interest rate frequently remains unchanged.…”

“…Regarding to India, Akram and Das (2019) considered nominal yields of India's 3-month treasury bill as an indicator for short-term rate and examined that it plays a key role in determining government bond yield in India in both short run and long run. The paper illustrated the significantly positive impact on Indian government bond yields, being consistent with (Akram & Das, 2019;Zhou, 2021).…”

“…It interprets that the increase in exchange rate USD/VND (the depreciation of Vietnam Dong) makes the government bond yields change fall. This is contrast to some previous research such as (Afonso & Nunes, 2015;Hsing, 2015;Tjandrasa, 2017;Zhou, 2021). Those studies indicate that the depreciation of domestic currency make the fixed income asset less attractive, so the government bond yields rise to compensate for the investment.…”

“…Moreover, in GARCH model, the impacts of Inflation on the change in 3-year government bond yields is significant at the 5% level. In other words, the effect of inflation on the change in long-term government bond yield such as 10-year government bond is more significant than the impact of it on the change in shorter-term government bond yields as (Zhou, 2021) claimed. Most of the coefficients are negative.…”

“…For emerging markets, Malešević Perović (2015) revealed that the significantly negative relationship between GDP growth and government bond yield was explained by the fact that the growth of GDP increases tax revenue, which leads to the decrease in government's bond issuance, declining the government bond yield in the CEE countries. Moreover, Zhou (2021) showed that Inflation rate has a significantly positive effect on government bond yield in the short run while it has opposite side in the long run. Moreover, Jaramillo and Weber (2013) indicated that GDP growth and Inflation rate are the factors that negatively affect the government bond yield at the time of low global risk aversion.…”