Much Ado About Nothing: A Study of Differential Pricing and Liquidity of Short and Long Term Bonds
63 Pages Posted: 11 Dec 2018 Last revised: 16 Apr 2019
Date Written: December 2018
Are yields of long-maturity bonds distorted by demand pressure of clientele investors, regulatory effects, or default, flight-to-safety or liquidity premiums? Using data on German nominal bonds between 2005 and 2015, we study the differential pricing and liquidity of short and long maturity bonds. We find statistically significant, but economically negligible segmentation in yields and some degree of liquidity segmentation of short-term versus long-term bonds. These results have important policy implications for the €17.5 trillion European pension and insurance industries: long maturity bond yields seem appropriate for the valuation of long-term liabilities.
Keywords: Sovereign Bonds, Term Structure of Interest Rates, Segmentation, Liquidity, Flight-to-safety, Credit Risk, Unconventional Monetary Policy
JEL Classification: G01, G12, G15, G18
Suggested Citation: Suggested Citation