Explaining Long-Term Bond Yields Synchronization Dynamics in Europe

We examine the empirical determinants of sovereign yield synchronization dynamics in the European Monetary Union. Using a time-varying measure of (long-term) government bond yields synchronization and Bayesian Model Averaging methods, we show that the persistence of synchronization measures differs significantly between GIIPS countries (Portugal, Italy, Ireland, Greece, and Spain) and the rest of the monetary union, as well as across periods characterized by whether the zero lower bound of interest rates was binding or not and the post-Draghi whatever it takes era. The degree of synchronization in inflation rates with the rest of the currency area is a robust predictor of the synchronization of sovereign yields, as opposed to economic fundamentals describing the fiscal positions of individual countries. An out-of-sample forecasting exercise reveals that accounting for the most relevant economic fundamentals within the monetary union can lead to improvements in the directional accuracy of the forecasts of yield synchronization rates only for GIIPS countries.