Determinants Of Government Bond Spreads In The Euro Area

"This paper provides an empirical analysis of the determinants of government bond yield spreads in the euro area with a focus on developments during the global financial crisis that started in 2007. In line with the previous literature, we find that international factors, in particular general risk perception, play a major role in explaining governments bond yields differentials. While domestic factors such as liquidity and sovereign risk appear to be smaller but non-negligible drivers of yield spreads our results point to significant interaction of general risk aversion and macroeconomic fundamentals. Moreover, the impact of domestic factors on bond yield spreads increase significantly during the crisis, when international investors started to discriminate more between countries. In particular, the combination of high risk aversion and large current account deficits tend to magnify the incidence of deteriorated public finances on government bond yield spreads. Overall, our results suggest that an improvement in global risk perception will lead to a narrowing of intra-euro area bond yield differentials. However, the differing impact of the crisis on Member States' public finances and the expected higher risk awareness of investors after the crisis could keep government bond yield spreads at a higher level then in the pre-crisis period."--Publication information page.

This paper analyses the determimants of emerging market sovereign bond spreads by examining the short and long-run effects of fundamental (macroeconomic) and temporary (financial market) factors on these spreads. During the current global financial and economic crisis, sovereign bond spreads widened dramatically for both developed and emerging market economies. This deterioration has widely been attributed to rapidly growing public debts and balance sheet risks. Our results indicate that in the long run, fundamentals are significant determinants of emerging market sovereign bond spreads, while in the short run, financial volatility is a more important determinant of sperads than fundamentals indicators.

We analyze determinants of sovereign bond yields in 22 advanced economies over the 1980-2010 period using panel cointegration techniques. The application of cointegration methodology allows distinguishing between long-run (debt-to-GDP ratio, potential growth) and short-run (inflation, short-term interest rates, etc.) determinants of sovereign borrowing costs. We find that in the long-run, government bond yields increase by about 2 basis points in response to a 1 percentage point increase in government debt-to-GDP ratio and by about 45 basis points in response to a 1 percentage point increase in potential growth rate. In the short-run, sovereign bond yields deviate from the level determined by the long-run fundamentals, but about half of the deviation adjusts in one year. When considering the impact of the global financial crisis on sovereign borrowing costs in euro area countries, the estimations suggest that spreads against Germany in some European periphery countries exceeded the level determined by fundamentals in the aftermath of the crisis, while some North European countries have benefited from “safe haven” flows.

We assess the determinants of sovereign bond yield spreads in the period 1999-2016, considering non-conventional monetary policy measures in the Euro area. We use a 2-step approach: i) confirm (by means of model selection methods) and estimate (by means of panel techniques) the determinants of sovereign bond yield spreads; ii) compute bivariate time-varying coefficient (TVC) models of each determinant on government bond spreads and analyse the temporal dynamics of resulting estimates. Our results show that the baseline determinants of sovereign bond yield spreads in the Euro area are the bid-ask spread, the VIX, fiscal developments and rating developments, REER, and economic growth. In recent years, additional relevant determinants became the QE measures implemented by the ECB in the aftermath of the economic and financial crisis. From the TVC analysis, the Covered Bond Purchase Programme contributed to reduce yield spreads in all Euro area countries in the analysis, particularly in the crisis period, 2011-2013. In addition, longer-term refinancing operations contributed to reduce yield spreads in most countries.

While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? In line with previous studies, the paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors' frailty and future debt dynamics. The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads.

Volatility in Italian sovereign spreads has increased since mid-2011. This paper finds that news on the euro area debt crisis and country specific events were important drivers of sovereign spreads. Movements in sovereign spreads affect CDS spreads and bond yields of Italian banks, and are transmitted rapidly to firm lending rates. Banks with lower capital ratios and higher nonperforming loans were found to be more sensitive to swings in sovereign spreads. Credit supply constraints due to bank funding shortages from the sovereign debt crisis were a major factor behind the lending slowdown in late 2011, while in 2012 weak demand appears to have been driving changes in credit more than supply.

This paper studies the determinants of interest rate spreads of euro area 10 year government bonds against the benchmark, the German bund, after the introduction of the euro. In particular, it pays attention to the question whether market discipline is advanced or obstructed by financial integration and by fiscal rules like the Stability and Growth Pact. We first argue that financial integration - by improving market efficiency - is instrumental for markets to exert their disciplinary role. Next, we discuss the relationships between market discipline and fiscal rules, arguing that these in principle may reinforce each other. Finally, we provide strong empirical evidence that spreads depend on the ratings of the underlying bond and to a large extent are driven by the level of short-term interest rates.