Abstract

Security Issuing, Security Purchasing and Interest Rate Formation on the Bond Market

All important sectors of the economy play a part in operations on the bond market. Market participants encounter each other whose mode of behaviour is determined by very widely differing motives. In order to arrive at a better understanding of the process of interest rate setting, behaviour equations are set up for the most important supply and demand groups and estimates are made for the latter for the period from 1974 to 1983. In contrast to the portfolio theory analyses, special allowance is made for the significance of the liquidity situation for the investment decisions. In particular, the estimate results permit the following conclusions to be drawn:

1. The fixed-interest securities in the portfolios of the banks have the function of a liquidity buffer. The banks give preference to the granting of direct loans over the acquisition of bonds.

2. Private households acquire fixed-interest bonds largely in the light of the offered interest level. Expectations as to price changes play a subsidiary role.

3. For insurers, bond are a preferred form of investment for their premium receipts. Securities are purchased practically continuously.

4. The commercial banks issue increasing amounts of fixed-interest securities when their liquidity position deteriorates. Increasing grants of direct loans increases the debts of the banks on the bond market.

5. The security issues of the government can be explained econometrically only inadequately; the government tends to reduce its sales of securities when the interest level is too high.

The findings of the study confirm the close interdependence of the money and capital markets. In the attempt to interpret interest rate movements in the past, it proves that, aside from the price increase rate, the liquidity position of the banking sector is the most important determinant of the interest rate trend. The estimated results of the interest function offer an explanation of the rise in interest in 1983, with respect to which it was frequently presumed that it could not be interpreted on the basis of the conventional explanation patterns. With the estimated modes of behaviour in the period under review, the interest rate movements in 1983 can be largely reconstrued. According to the calculations, the rise in interest rates in spring 1983 was attributable not only to the rising interest level in the United States, but also to the restriction of bank liquidity by the Bundesbank.