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How Do Macroeconomic Fundamentals Affect Sovereign Bond Yields? New Evidence from European Forecasts

Author

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  • João Tovar Jalles

Abstract

Macroeconomic fundamentals impact the long-term insolvency problem of a country. This article empirically assesses the role played by both macroeconomic and fiscal fundamentals, proxied by a set of European Commission’s forecasts, in affecting sovereign bond yields. We look at a large panel of 25 European countries between 1992 and 2015. By means panel and time-series approaches, we find that lower short-term interest rates and better fiscal institutions tend to lower bond yields. The better the economic and fiscal outlooks going forward, the lower the yields demanded in international markets. Timing also matters: investors seem to pay more attention to forecasts the shorter the forecast horizon, and they started carrying more weight since the Global Financial Crisis. Finally, the impact of yields’ determinants is different across countries, being more prominent in those characterized by economic hardship conditions (Greece, Ireland, Spain, and Portugal). (JEL codes: C23, E44, H68)

Suggested Citation

  • João Tovar Jalles, 2019. "How Do Macroeconomic Fundamentals Affect Sovereign Bond Yields? New Evidence from European Forecasts," CESifo Economic Studies, CESifo Group, vol. 65(1), pages 44-67.
    • Handle: RePEc:oup:cesifo:v:65:y:2019:i:1:p:44-67.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ify025
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    Citations

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    Cited by:

    1. Mr. Serhan Cevik & João Tovar Jalles, 2020. "This Changes Everything: Climate Shocks and Sovereign Bonds," IMF Working Papers 2020/079, International Monetary Fund.
    2. Cevik, Serhan & Jalles, João Tovar, 2022. "This changes everything: Climate shocks and sovereign bonds⁎," Energy Economics, Elsevier, vol. 107(C).
    3. Stéphanie Pamies & Nicolas Carnot & Anda Pătărău, 2021. "Do Fundamentals Explain Differences between Euro Area Sovereign Interest Rates?," European Economy - Discussion Papers 141, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. European Fiscal Board (EFB), 2023. "2023 annual report of the European Fiscal Board," Annual reports 2023, European Fiscal Board.

    More about this item

    Keywords

    forecast error; forecast revision; bond spreads; instrumental variables; SUR estimation; Eastern Europe; Global Financial Crisis;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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