The impact of extreme weather events on the term structure of sovereign debt

This paper examines the impact of extreme weather events on the term structure of sovereign bond yields in a global panel. Using local projections to estimate the dynamic response of yields and their expected short rate and term premium components to such events, we uncover significant heterogeneity across countries. We show that differentiating between strong and weak fiscal regimes helps explain variations in both yield and inflation responses. Among advanced economies, countries with low debt levels experience a significant rise in short rate expectations as investors anticipate tighter monetary policy in response to inflationary pressures. Advanced economies with high levels of debt primarily exhibit a rise in term premiums, consistent with investors pricing in more issuance. While fiscally constrained emerging economies exhibit muted yield responses, their higher-rated peers experience a decline in expected short rates and an increase in term premiums, potentially suggesting that investors anticipate monetary easing and increased debt issuance following disasters.