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The emergence of new benchmark yield curves

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  • Philip D Wooldridge

Abstract

To properly guide decisions to borrow and invest in an economy, capital markets should incorporate all available information about the future prospects of borrowers and the willingness of investors to postpone consumption and take risks. The process by which prices in fixed income markets adjust to new information and move towards their equilibrium value is more efficient when market participants agree on certain instruments that can serve as references – or benchmarks – for pricing other securities. In recent decades, market participants have relied on government yield curves to assess the cost of funds at different borrowing horizons; price discovery about inflation prospects and other macroeconomic fundamentals occurred mainly in government securities markets. But private sector debt instruments, in particular collateralised obligations and interest rate swaps, also have the potential to serve as benchmark yield curves, and indeed are increasingly being used as such.

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  • Philip D Wooldridge, 2001. "The emergence of new benchmark yield curves," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:0112f
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    References listed on IDEAS

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    1. Wolfgang Schulte & Roberto Violi, 2002. "Interactions between cash and derivatives bond markets: some evidence for the euro area," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 222-267, Bank for International Settlements.
    2. the Study group on fixed income markets, 2001. "The changing shape of fixed income markets," BIS Working Papers 104, Bank for International Settlements.
    3. Study group on fixed income markets, 2001. "The changing shape of fixed income markets," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 1-43, Bank for International Settlements.
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    1. C. Sirmans & Stanley Smith & G. Sirmans, 2015. "Determinants of Mortgage Interest Rates: Treasuries versus Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 34-51, January.
    2. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2016. "Mortgage Risk and the Yield Curve," The Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1220-1253.
    3. Benjamin H Cohen & Hyun Song Shin, 2002. "Positive feedback trading in the US Treasurey market," BIS Quarterly Review, Bank for International Settlements, June.
    4. Feldhütter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
    5. Malkhozov, Aytek & Mueller, Philippe & Vedolin, Andrea & Venter, Gyuri, 2013. "Mortgage hedging in fixed income markets," LSE Research Online Documents on Economics 119032, London School of Economics and Political Science, LSE Library.
    6. Eli Remolona & James Yetman, 2022. "De jure Benchmark Bonds," International Journal of Central Banking, International Journal of Central Banking, vol. 18(3), pages 89-124, September.
    7. Eli Remolona & James Yetman, 2019. "The rise of benchmark bonds in emerging Asia," BIS Papers chapters, in: Bank for International Settlements (ed.), Asia-Pacific fixed income markets: evolving structure, participation and pricing, volume 102, pages 67-79, Bank for International Settlements.
    8. Reszat, Beate, 2003. "Japan's Financial Markets: The Lost Decade," HWWA Discussion Papers 231, Hamburg Institute of International Economics (HWWA).
    9. Hanson, Samuel G., 2014. "Mortgage convexity," Journal of Financial Economics, Elsevier, vol. 113(2), pages 270-299.
    10. Reszat, Beate, 2003. "Japan's Financial Markets: The Lost Decade," Discussion Paper Series 26335, Hamburg Institute of International Economics.

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