The history of the capital markets is filled with the force of financial incentives

I will be releasing a new working paper soon, and in anticipation of that ill-fated event I've decided to post some early findings and ideas.  One of the biggest ideas I have laid out is that capital market issuance is dominated by the financial incentives to issue new debt and equity.

What are financial incentives? Financial incentives are those created by financial markets, and asset prices.  If equity prices are higher today than they were a year ago, corporations will have an incentive to issue new equity.  If bond yields are lower today than they were a year ago then corporations will have the incentive to issue new debts to retire old ones.  These examples extend to all private issuance.

What are economic incentives? Economic incentives are those originating from the real economy.  For example, a fall in wage growth will cause households to have more incentive to refinance on their mortgages.

Capital Market issuance provides for a huge cash impulse into our economy.  The charts that follow will show the concurrent effects of financial incentives on capital market issuance across time and space.

note the correlations between financial and economic incentives with issuance in the table below:

Let's start with Corporations

 State and Local Issuance:

Mortgages have always flowed from financial incentives:


Notes to Table 2: 12m log changes in all series except for the ISM Manufacturing and ISM Prices Index. 1981/7 - 2019/2. Financial Incentives from left to right are: TBILL 3M yield, UST 5Y, UST5Y, Bond Buyer 30 Index, Freddie 30Y mortgage yield, BAA yield, and S&P 500 price index. US Bill Issuance, Treasury Note and Bond Issuance, US Govt total issuance, and State and Local Issuance is SMA(log(x),6).  Sources: Capital Markets Data; BOA; FRED MD; SIFMA; Bond Buyer; and Robert Shiller.