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The State-Contingent Debt Premium: Evidence from French Public Bonds

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  • Kris James Mitchener
  • Goncalo Pina

Abstract

State-contingent debt (SCD) instruments have been proposed as an improvement to sovereign debt markets, but their issuance costs are not well understood. We estimate the SCD premium at issuance and for more than a decade thereafter, employing a quasi-twin bond strategy that uses two very similar French government bonds issued in 1956: one conventional bond and one state-contingent bond with coupons linked to industrial production. At issuance, the expected yield on the SCD bond was 77 basis points higher than its twin. Due to robust growth in the French economy ex-post, the realized SCD premium at issuance was roughly twice as large (146 basis points). However, rising market prices of the state-contingent bond reduced both spreads to zero by 1964. They rose again in May 1968 following an unexpected general strike, which significantly reduced French industrial production; however, by 1970, the SCD premium had fallen to values close to zero.

Suggested Citation

  • Kris James Mitchener & Goncalo Pina, 2026. "The State-Contingent Debt Premium: Evidence from French Public Bonds," CESifo Working Paper Series 12630, CESifo.
    • Handle: RePEc:ces:ceswps:_12630
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    Keywords

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    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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