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Bond Convenience Yields in the Eurozone Currency Union

Author

Listed:
  • Jiang, Zhengyang

    (Northwestern Kellogg)

  • Lustig, Hanno

    (Stanford GSB, NBER, SIEPR)

  • Van Nieuwerburgh, Stijn

    (Columbia Business School, NBER, CEPR)

  • Xiaolan, Mindy Z.

    (UT Austin McCombs)

Abstract

This paper analyzes bond convenience yields in a currency union. The intertemporal government budget constraint requires member countries’ bond convenience yields and default spreads to adjust in response to shocks to their government surpluses. In the data, adjustments to convenience yields explain a larger fraction of the variation in Eurozone bond yields than default spreads. Higher convenience yields are correlated with stronger fiscal conditions both in the cross-section and in the time series. These findings imply large fiscal costs especially on the peripheral countries. If all Eurozone countries could have issued sovereign bonds at the same convenience yields as Germany, they would have raised an extra 281 billion euros in cumulative revenues from bond issuance between 2003 and 2020, representing 2.6% of 2020 Eurozone GDP.

Suggested Citation

  • Jiang, Zhengyang & Lustig, Hanno & Van Nieuwerburgh, Stijn & Xiaolan, Mindy Z., 2021. "Bond Convenience Yields in the Eurozone Currency Union," Research Papers 3976, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3976
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    Cited by:

    1. Gilchrist, Simon & Wei, Bin & Yue, Vivian Z. & Zakrajšek, Egon, 2022. "Sovereign risk and financial risk," Journal of International Economics, Elsevier, vol. 136(C).
    2. Christian Bittner & Diana Bonfim & Florian Heider & Farzad Saidi & Glenn Schepens & Carla Soares, 2022. "The Augmented Bank Balance-Sheet Channel of Monetary Policy," ECONtribute Discussion Papers Series 149, University of Bonn and University of Cologne, Germany.
    3. Corradin, Stefano & Grimm, Niklas & Schwaab, Bernd, 2021. "Euro area sovereign bond risk premia during the Covid-19 pandemic," Working Paper Series 2561, European Central Bank.
    4. Ricardo Reis, 2022. "Debt Revenue and the Sustainability of Public Debt," Journal of Economic Perspectives, American Economic Association, vol. 36(4), pages 103-124, Fall.
    5. Corradin, Stefano & Schwaab, Bernd, 2023. "Euro area sovereign bond risk premia before and during the Covid-19 pandemic," European Economic Review, Elsevier, vol. 153(C).

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