Rational Inattention in Government Bond Auctions: Evidence from Yield Spreads in Armenian Treasury Auctions

Investors’ behavior in the auctions for government bonds is closely associated with the processing and valuing of information. This study explores investors’ behavior in relation to information in the context of the sovereign debt market in Armenia in August 2017 to December 2025. Armenia has a small financial market, which is relatively deep and involves only a small number of investors. This particular situation allows for testing the applicability of the rational inattention theory. While information in a small open economy can be abundant, it does not follow that information is valued in the same way. Investors in a small open economy focus their attention on monitoring some salient policy variables, including the central bank policy interest rate and headline inflation but ignore some more specific signals such as demand dynamics. We suggest that the spread between the cut-off yield and the weighted average yield in the auction can be used as a measure of information inattention. According to the rational inattention theory, investors allocate their attention strategically and focus on those signals that can be obtained easily and publicly. Therefore, our hypothesis is that the auction spread is consistent with partial information processing, whereby demand signals are underweighted relative to the policy rate. Indeed, the analysis suggests that the cut-off yield remains correlated with the policy rate, whereas the spread does not increase. This is consistent with the hypothesis that yield spreads reflect bounded rationality in attention allocation. During the periods of increased need for government borrowing, auctions become the key sources of signaling and thus need to be studied.