Research and Publications
Government Risk Premiums in the Bond Market: EMU and Canada
2009, European Journal of Political Economy
Ludger Schuknecht, Jürgen Von Hagen, Guido Wolswijk
This article looks at US$ and DM/Euro-denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads during the crisis can largely be explained on the basis of the same variables as before the crisis. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.
von Hagen, Jürgen, Ludger Schuknecht, and Guido Wolswijk (2009), “Government Risk Premiums in the Bond Market: EMU and Canada,” European Journal of Political Economy, Vol. 25, No. 3, September, pp. 371-384.
Sovereign risk premiums; Bond markets; Financial crisis