3 Issuing costs of state guaranteed bonds - Financial Risk and ...

3 Issuing costs of state guaranteed bonds
Figure 11: Market perceptions of uncertainty, VSTOXX Index, %age deviations from median,
2008Q4-2010Q4
48
V2X Index, %age deviations from median
-80 -60 -40 -20 0 20 40 60 80 100
Source: Bloomberg
Deviations from median V2X Index
Issuing cost difference between non-SG bonds and SG bonds
2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4
Figure 12 shows SG and non-SG issuing costs by bond rating. There are several noteworthy
observations to be made.
Firstly, the higher the bond rating, the lower the issuing cost. This can be observed by the
concentration of data points around low issuing costs for top-rated bonds compared to other
bonds.
However, secondly, the relationship between bond rating and issuing cost is noisy – for a given
level of issuing cost, bond ratings can vary widely. This is partly due to investors taking other
factors into account in addition to bond ratings when assessing credit risk. Moreover, the
relationship between bond rating and issuing cost is noisier at lower ratings due to these being
more widely defined and therefore consisting of a more heterogeneous mix of credit risks.
Thirdly, there are a large number of SG bonds with an AAA or AA+ rating compared to non-SG
bonds, which are primarily rated AA- (relative to the total number of SG and non-SG bonds,
respectively).
-80 -60 -40 -20 0 20 40 60 80 100
Issuing cost difference, median z-spread/zero discount margin