Shaking the Capital Markets Tree: Euro Area Capital Market Sensitivity to Stakeholder Activities During the Negative Interest Rate Regime

Abstract

This contribution analyses the impact of stakeholder interactions with the market as a consequence of the negative interest rate regime on the pricing of selected Floating-rate notes (FRNs), to understand the range of reactivity of financial markets and issuers to uncertainty caused by an untested boilerplate term in bond contracts. The subject clause stipulates ‘not applicable’ as the minimum rate of interest, which raises confusion regarding payment obligations between issuers and investor. Subsequently, we hypothesize that markets would be noticeably more sensitive to stakeholder activities, adapting to reduce risks. Using event studies, we find that markets do, to varying degrees, price stakeholder activities like court decisions, industry association statements, and public positions of sovereigns. In turn, issuers are willing to react to legal risks quickly, if costs of inertia are low. This is reflected also in the significant changes in the FRN issuance structure in the past few years.

Keywords: Sovereign Bond Markets, Floating Rate Notes, Negative Interest Rates, Legal Uncertainties

JEL Classification: K00