Trade-Policy Uncertainty vs. Geopolitical Risk: What Moves Sovereign CDS in the Backstop Era, 2015-2025

Uncertainty surrounding trade-policy and geopolitical tensions is widely viewed as a key driver of sovereign credit risk, yet little is known about the magnitude, persistence and comparative importance of these shocks in the post-crisis environment. This paper provides the first systematic cross-country assessment of how trade-policy uncertainty (TPU) and geopolitical risk (GPR) affect sovereign CDS spreads across 15 economies, including euro-area sovereigns, the United States and China, over 2015-2025. We combine a recursively identified VAR with oil and exchange-rate controls and a time-varying-parameter VAR to measure both average impulse responses and evolving transmission patterns. Three results stand out. First, TPU and GPR shocks generate economically small and short-lived movements in sovereign CDS spreads: peak effects remain well below one basis point and dissipate within weeks, even during the US-China trade tensions, the onset of COVID-19 or the 2022 energy shock. Second, cross-country heterogeneity reflects institutional and structural features: core euro-area sovereigns show near-zero reactions, Italy exhibits sign-asymmetric responses and peripheral and small open economies display episodic but non-persistent sensitivity. The United States and China also react modestly. Third, GPR shocks tend to be slightly more impactful than TPU, yet neither induces persistent repricing of sovereign risk. Overall, the findings suggest that the post-crisis monetary framework has significantly constrained the transmission of global uncertainty to sovereign CDS spreads.