Determinants of bond yield spread changes in South Africa

Abstract

This paper offers an emerging market perspective on the determinants of bond yield spread changes. The study covers the period 2005-2013 and it is based on a sample of 106 corporate vanilla bonds listed on the South African market. To capture the impact of the financial crisis of 2007-2008, the sample period is split into three sub periods, the pre-financial crisis (2005-2006), mid-financial crisis (2007-2009) and post financial crisis (2010-2013). The study shows that changes in equity volatility, interest rate level and the yield curve slope are significant determinants of bond yield spreads. The impact of equity volatility and interest rate level is more pronounced during the mid-financial crisis period. Controlling for credit ratings and bond convexity does not alter the findings. The study confirms the results documented in developed countries, and highlights the key determinants of bond values and returns of active bond trading strategies. For policy makers, the findings of this study call for further measures and reforms to address liquidity challenges on the bond market and volatility induced by non-resident investors.

Keywords: Equity volatility; Bond yield spread changes; Corporate bonds; South Africa; Emerging markets