Interest Rates, Portfolio Behavior, and Marketable Government Securities

Terrell, William T.; Frazer, William J.

doi:10.2307/2978500

Cited by 3 publications

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“…6 The second type of study in which U.S. yield series have been misused relates to the impact of relative security supplies on the term structure of Treasury securities. For example, Hambor and Weintraub [11] and Terrell and Frazer [21] both relate the ratio of the Treasury bill rate and the average long-term U.S. yield series to relative stocks of shortand long-term U.S. securities. Because no new U.S. bonds were issued over a large part of the period studied, however, the average long-term U.S. yield series is heavily influenced by the yields on low coupon, discount and flower bonds.…”

Section: The Tax Reform Act Of 1976 Changed the Tax Basis For Inheritmentioning

confidence: 99%

The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

Cook¹,

Hendershott²

1978

The Journal of Finance

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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Wiley and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access I. INTRODUCTIONOBSERVED DIFFERENTIALS among yield series for different types of long-term instruments-U.S. government bonds, municipal bonds, corporate bonds and residential mortgages-vary considerably over time. Many factors can contribute to observed long-term yield spreads, the most important of which are "technical" factors that relate to differences in the particular characteristics of instruments or in the investors that purchase them. These include the tax status of various types of income accruing to the security and the degree of certainty associated with that income. Long-term yield spreads might also be affected by relative security supplies and relatively exogenous demands, e.g., Federal agency demands for residential mortgages, particularly if institutional constraints on permissible yields or on the various sectors that purchase the long-term instruments exist. Failure to consider the effects of all of these factors has frequently created misunderstanding both in the financial press and in academia about the causes of observed yield spreads. For example, attempts have been made to measure the impact on long-term yield spreads of individual factors-such as default risk or relative security supplies-by comparing yield series without proper regard for the concurrent impact of other technical and/or fundamental factors.This paper deals exclusively with long-term corporate and U.S. government bond yields. The most widely used series are Salomon Brother's Aa deferred call new issue utility yield and the Federal Reserve Bulletin's average yield on bonds maturing or callable in 10 years or more.' The spread between these series is shown as the solid line in Chart 1. (The dashed line will be discussed later.) The spread has moved over a wide range, rising sharply from 40 basis points in late 1965 to 235 basis points in the second quarter of 1970, subsequently falling to 140 basis points in early 1973, and then rising to almost 300 basis points in the third quarter of 1974. The central question addressed in this paper is what have been the relative contributions of taxes, risk, and relative security supplies as determinants of these movements?The general procedure used to deal with this question is as follows: First, direct adjustments are made to the yield series to account for some factors affecting them differently. These include the unusual tax treatment of some of the income from

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Section: The Tax Reform Act Of 1976 Changed the Tax Basis For Inheritmentioning

confidence: 99%

The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

Cook¹,

Hendershott²

1978

The Journal of Finance

View full text Add to dashboard Cite

show abstract

“…The second type of study in which U.S. yield series have been misused relates to the impact of relative security supplies on the term structure of Treasury securities. For example, Hambor and Weintraub [11] and Terrell and Frazer [21] both relate the ratio of the Treasury bill rate and the average long‐term U.S. yield series to relative stocks of short‐ and long‐term U.S. securities. Because no new U.S. bonds were issued over a large part of the period studied, however, the average long‐term U.S. yield series is heavily influenced by the yields on low coupon, discount and flower bonds.…”

Section: Technical Factors Influencing Us Yield Seriesmentioning

confidence: 99%

The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

Cook

Hendershott

1978

The Journal of Finance

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THE DEMAND FOR FINANCIAL ASSETS BY THE BRITISH LIFE FUNDS—A COMMENT^*

Dodds¹

1975

Oxf Bull Econ Stat

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It is a disequilibrium partial adjustment model which focuses on the problem of the optimal rate of portfolio adjustment when the market for financial assets is imperfectly competitive. [(1) p. 61.] Whilst Dr. Ryan has made a laudable attempt at developing a general model of portfolio review the purpose of this Comment is to illustrate several shortcomings of the Ryan approach as well as to offer further background evidence on life company portfolio behaviour. We begin with a general comment on the specification of models to 'explain' financial institutions' portfolio behaviour, from which our comments on Dr. Ryan's model follow naturally.It would simplify life for the monetary economist if he could discover a model that had universal applicability in 'explaining' the portfolio behaviour of all institutional investors. However, intuition, economic theory, and the data on the financial activities of these investors all lead us to the conclusion that no such ideal state is attainable. Standard economic theory would suggest that if we are to examine the participation of institutional investors on the financial markets we need to consider at least two things at the outset: first we need to inquire into the 'behaviouristic background' of the institutions under study, namely its objective or raison d'être; second, attention must be given to the constraints that might impede the institution in its endeavours to meet its objective, such as liquidity requirements which may be dictated by statutory requirements as in the case of the l2% reserve ratio for banks and the 74% liquidity ratio for Building Societies. For example, financial institutions may be attempting to maximize profits for a particular level of 'risk' through shuffling their portfolio period by period; others may be safety-first investors (very much 'risk averters') so that they hedge their assets with liabilities. We may say that Commercial Banks and Discount Houses are speculators and standard portfolio behaviour procedure models based on such a behaviour which have provided reasonable empirical results explain the behaviour of these institutions (see for example the work of J. M. Parkin [1], [2]). But such speculative models do not have universal applicability and as an example we may cite Building Societies, where it has been shown that a Parkin-type speculative

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Interest Rates, Portfolio Behavior, and Marketable Government Securities

Cited by 3 publications

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The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

THE DEMAND FOR FINANCIAL ASSETS BY THE BRITISH LIFE FUNDS—A COMMENT^*

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Interest Rates, Portfolio Behavior, and Marketable Government Securities

Cited by 3 publications

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The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

The Impact of Taxes, Risk and Relative Security Supplies on Interest Rate Differentials

THE DEMAND FOR FINANCIAL ASSETS BY THE BRITISH LIFE FUNDS—A COMMENT*

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THE DEMAND FOR FINANCIAL ASSETS BY THE BRITISH LIFE FUNDS—A COMMENT^*