Forecasting of Government Yield Curve in Post-Corona Pandemic

Abstract

The Indonesia government conducts several fiscal strategies to solve Revenue and Expenditure Budget (APBN)’s deficit due to corona pandemic by relaxation of APBN’s deficit policy, using surplus balance, upsizing loan and bond in domestic and valas currency. Upsizing or issuance a new Indonesian bon called SUN, would increase cost of rate is paid by government and its maturity that impacted to yield curve and risk of SUN. It has inspired this research to (1) investigate the determinant of yield curve due to shocks that occur in Indonesian macroeconomic during the pandemic (2) the impact of the pandemic on SUN’s risk and (3) the forecast of the yield curve in SUN after the pandemic using the VAR / VECM method. The reasearch used secondary data of bond yield from Indonesian Stock Market and imposed the effect of such as inflation, BI Rate, Kurs and foreign exchange that is taken from several sources such as BPS, Central Bank of Indonesia and Bloomberg during 2015 January until 2020 May. This research proves that the five main macroeconomic indicators have an influence in the short and long term on the yield curve. YIELD, GDP and BIR variables have a significant negative effect in the short term on the yield curve, whereas CPI, KURS and CD have no significant effect. The ECT’s coefficient shows the speed of adjustment towards the long-term balance and the BI Rate adjustment is faster than other variables with an ECT coefficient of 0,33. The estimation results show that the average R-squared is above 55 percent with the highest value of 79,35 percent, this indicates that the equation was formed because the research variables amounted to the R-squared results.

Behavioral Financial Perspective of Government Bonds During Covid 19 Pandemic

“…The impact of fear of Covid 19 on the yield of government bonds was supported by Naeem et al, (2021) which shows fear is associated with bond markets. In addition, this result is explained by market uncertainty causes a lack of investor purchasing power of bonds which causes a decrease in bond prices and increasing yield (Mita Nia & Hamzah, 2021). The results of this study provide new evidence that fear of Covid 19 does not only affect stock investment instruments but also government bond investments which increase government bond yields.…”

“…According to Mita Nia & Hamzah (2021), purchasing activities will increase bond prices and reduce yield in the short term. But in the long term, economic recovery by the government will increase inflation which marks an increase in economic activity.…”

“…A declining yield indicates low investment risk in bonds, thereby increasing bond prices, and vice versa. Before investing in bonds investors should know the determinant yield, such as maturity, nominal value, coupon, and market interest rates (Mita Nia & Hamzah, 2021). This study uses 10-year government bonds as a reference for an overall yield of government bonds.…”