Editor’s Letter

The current inverted yield curve is a well-known indicator of a forthcoming recession. Therefore, we begin this issue of The Journal of Fixed Income with articles related to credit spreads. In our lead article “Internet Searches, Household Sentiment, and Credit Spreads,” Hans Bystrom finds that household default sentiment is positively correlated with credit default swap spread levels, but it is the default probabilities implied by structural models of credit risk that contributes more to explaining credit spreads. Then, in “An Exact Structural Model for Evaluating Credit Default Swaps: Theory and Empirical Evidence,” Ren-Raw Chen and Pei-Lin Hsieh develop a model for credit default swaps that eliminates many previous barriers of computational complexity, expense and still allows random interest rates and debt structure flexibility. Applications to convertible bonds, capital structure issues, and the valuation of credit default swaps are analyzed.

It is evident that the Federal Reserve has an enormous influence on financial markets. No surprise that there is massive attention paid to the Fed’s announcements and there is considerable value in better understanding their decision-making process. In the next article, “How Does the Fed Make Decisions: A Machine Learning Augmented Taylor Rule,” Boyu Wu, Amina Enkhbold, Asawari Sathe, and Qian Wang define and use a machine learning non-linear approach with inflation, labor markets, financial condition, and global markets factors for a 77% improvement over the traditional Taylor rule in forecasting federal funds rates. In the next article, “The Impact of Short Selling in the Cross-Section of Corporate Bond Returns,” Desislava Vladimirova, Thomas Markl, and Philip Messow, examine the relationship between short-selling information and bond performance. The empirical evidence indicates a higher information ratio and Jensen alpha performance.

In early 2020 we all experienced the COVID-19 pandemic. The effect on bond and stock markets are a rapid reevaluation of future fundamental economic performance and the functioning of markets often cited as a liquidity crisis. In the next article, “COVID-19 Pandemic and Bond ETF Valuation Discount,” Hongfei Tang, Kangzhen Xie, and Xiaoqing Eleanor Xu find the discounts of US Bond ETFs relative to their net asset values to be significantly related to COVID deaths. This was, however, reversed after the Federal Reserve announced its intention to purchase corporate bonds and bond ETFs. Clearly, liquidity is important to financial stability.

Finally, in “Ultra Treasury Bond Futures,” Ren-Raw Chen, Dean Leistikow, You-Tseng Su, and Shih-Kuo Yeh provide empirical evidence that the quality option value is substantially higher for Ultra Treasury Bond futures (25–30 years to maturity deliverables) than regular futures.

We hope you enjoy this issue of The Journal of Fixed Income. Your continued support of the Journal is greatly appreciated.

Stanley J. Kon

Editor

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