Information Spillovers in Sovereign Debt Markets

We develop a theory of information spillovers in primary sovereign bond markets where governments raise funds from a common pool of competitive in-vestors who may acquire information about default risk and later trade in sec-ondary markets. Strategic complementarities in information acquisition lead to the co-existence of an informed regime with high yields and high volatility, and a Pareto-dominant uninformed regime with low yields and low volatility. Small shocks to default risk in a single country may trigger information acquisition, retrenchment of capital flows, and sharp yield increases within and across coun-tries. Competitive secondary markets strengthen information acquisition incen-tives, raise primary market yields, and amplify spillovers.