A global monetary policy factor in sovereign bond yields

We document the existence of a global monetary policy factor in sovereign bond yields, related to the size of the aggregate balance sheet of nine major central banks of developed economies that have implemented programs of large-scale asset purchases. Balance sheet policies of these central banks reduced the net supply of safe assets in the global economy, triggering a decline in global yields as investors rebalanced their portfolios towards more risky assets. We find that central banks' large-scale asset purchases have contributed to significant and persistent declines in long-term yields globally, ranging from around 330 bps for AAA-rated sovereigns to 800 bps for non-investment grade sovereigns. The stronger decline in yields of high-risk sovereigns can be partly attributed to the decline in the foreign exchange risk premium as their currencies appreciated. Global central bank asset purchases during the Covid-19 crisis have more than counterbalanced the effects of expanding fiscal deficits on global bond yields, driving them to even lower levels. Our findings have important policy implications: normalizing monetary policy by scaling down central bank balance sheets to pre-crisis levels may lead to sharp increases in sovereign bond yields globally, widening spreads and currency depreciations of vulnerable sovereigns with severe consequences for financial stability and the global economy. © 2023 Elsevier B.V.

A global monetary policy factor in sovereign bond yields

We document the existence of a global monetary policy factor in sovereign bond yields, related to the size of the aggregate balance sheet of nine major central banks of developed economies that have implemented programs of large-scale asset purchases. Balance sheet policies of these central banks reduced the net supply of safe assets in the global economy, triggering a decline in global yields as investors rebalanced their portfolios towards more risky assets. We find that central banks' large-scale asset purchases have contributed to significant and persistent declines in long-term yields globally, ranging from around 330 bps for AAA-rated sovereigns to 800 bps for non-investment grade sovereigns. The stronger decline in yields of high-risk sovereigns can be partly attributed to the decline in the foreign exchange risk premium as their currencies appreciated. Global central bank asset purchases during the Covid-19 crisis have more than counterbalanced the effects of expanding fiscal deficits on global bond yields, driving them to even lower levels. Our findings have important policy implications: normalizing monetary policy by scaling down central bank balance sheets to pre-crisis levels may lead to sharp increases in sovereign bond yields globally, widening spreads and currency depreciations of vulnerable sovereigns with severe consequences for financial stability and the global economy.

Covid-19, sovereign risk and monetary policy: Evidence from the European Monetary Union

This paper investigates the impact of Covid-19 pandemic and monetary policy measures adopted by the European Central Bank (ECB) on the sovereign risk for the European Monetary Union (EMU) countries for the period between March-2020 and November-2020 using daily data. The impact of Covid-19 and monetary policy shocks on the credit default swap rates and bond yields are investigated relying on a fixed effects panel regression model for five core (Germany, France, Austria, Netherlands, Belgium) and three periphery (Italy, Portugal and Spain) countries. To investigate the cross-country differences in the responses, the interactions of the independent variables with periphery dummy and other country-specific variables are included in the regressions. The results of the empirical analysis suggest that Covid-19 shock increased the sovereign risk in the periphery EMU countries significantly and monetary policy measures have been effective in easing financial conditions in these countries. The results are insignificant for the core countries. The results also show that financial stability alleviates the negative impact of Covid-19 on the sovereign risk.

Modelling international sovereign risk information spillovers: A multilayer network approach

Applying the TVP-VAR model, we creatively construct multilayer information spillover networks containing return spillover layer, volatility spillover layer and extreme risk spillover layer among 23 countries in the G20 to explore international sovereign risk spillovers. From the perspective of system-level and country-level measures, this article explores the topological structures of static and dynamic multilayer networks. We observe that (i) at the system-level, multilayer measures containing uniqueness edge ratio and average edge overlap show each layer has unique network structures and spillover evolution behavior, especially for dynamic networks. Average connectedness strength shows volatility and extreme risk spillover layers are more sensitive to extreme events. Meanwhile, three layers have highly intertwined and interrelated relations. Notably, their spillovers all show a great upsurge during the crisis (financial and European debt crisis) and the COVID-19 pandemic period. (ii) At the country-level, average overlapping net-strength shows that countries’ roles are different during distinct periods. Multiplex participation coefficient on out-strength indicates we’ll focus on countries with highly heterogeneous connectedness among three layers during the stable period since their underestimated spillovers soar in extreme events or crises. Multilayer networks supply comprehensive information that cannot obtain by single-layer.

Determinants of sovereign spreads in Sri Lanka: global factors and country-specific fundamentals

Purpose>The study aims to analyze and compare the influence of country-specific fundamentals and global conditions on sovereign risk of Sri Lanka within the sample period of 2006–2019 while employing Treasury bond rates as proxy for sovereign risk.Design/methodology/approach>The determinant powers of the variables are assessed using the auto regressive distributed lag (ARDL) model to verify both short- and long-run effects on sovereign spreads.Findings>The study finds that Sri Lanka's sovereign spreads are shaped by both country fundamentals and global factors, though local determinants tend to have greater influence when the directions of coefficients are ignored. While the impact of most variables was in line with the researchers' expectations, fiscal deficit was found to have an unconventional negative coefficient which may be explained by investors' optimistic take on Government's involvement in post-war economic development drive during the sample period, enabling Sri Lanka to attract low-cost funding.Research limitations/implications>The study excludes of impact of the ongoing coronavirus disease-2019 ( COVID-19) health crisis which may unduly distort the data. Further, the research does not capture the impact of change in sentiment owing to market information, debt dynamics and policy changes in Sri Lanka.Practical implications>The study reveals that a sound monetary policy directed at preserving both the internal and external value of currency as well as a disciplined fiscal policy are imperative to manage Sri Lanka's sovereign risk, particularly in the face of global uncertainties.Originality/value>The study adds to the literature by investigating the timely importance of a country's internal fundamentals against the global events. Furthermore, the research would complement the scarcity of research regarding that subject focused on the Sri Lankan economy, capturing the rapid variations in the fundamentals that the country has undergone since the end of the civil war while recognizing the growing influence of globalization over the recent years.

A Study on the Transnational Spillover Effects of Bank Risk and Sovereign Risk-From the Perspective of COVID-19 Epidemic Situation.

In recent years, the world economy and the global financial system have closely intertwined, deepened economic and financial integration via cross-border investments, financings, imports, and exports. Since banks serve as the core of a country's financial system, the risk status of banks directly affects the country's national credit and financial security. The current complexities of the international and domestic environments are increasing geopolitical risks. Moreover, there is increasing uncertainty recognition in the financial and economic development of all countries, more systemic banking risks, and sovereign risk transfer elements. In this scenario, resisting external risk input is essential to enhance risk prevention ability. Therefore, this paper adopted the VAR-based time domain and frequency model for a multi-dimensional analysis of the two perspectives of banking and sovereign risk spillover effects. The empirical results indicate that the entire sample under the static overflow effect always shows that most of the absorption is the banking sector risk, and sovereign risk is the leading risk spillover. In the frequency domain perspective, the short-term spillover effects between bank and sovereign risk are dominant. Moreover, in relation to the outbreak and continuous spread of the COVID-19 pandemic, the spillover effects are often dominated by adverse, long-term scenarios.

DOES SOVEREIGN RISK IMPACT BANKING RISK IN THE EUROZONE? EVIDENCE FROM THE COVID-19 PANDEMIC

This paper studies the impact of sovereign risk on Eurozone banking risk during a novel crisis such as the COVID-19 pandemic. Spillover effects on volatility are identified using Granger causality tests, a spillover matrix, and BEKK-GARCH models. The results confirm that an increase in Eurozone sovereign risk has impacted banking risk in Eurozone and that there is no evidence that sovereign risk in the countries of the Eurozone periphery is being transmitted to banking risk in the core countries during the crisis. These conclusions are very important for risk management and the design and monitoring of Eurozone financial policies.

Effects of monetary policy announcements on term premia in the euro area during the COVID-19 pandemic.

We study the effects of the announcement of the ECB's Pandemic Emergency Purchase Programme (PEPP) on ten-year government bond term premia in eleven euro-area countries, while controlling for other ECB statements. We find that the term premia of government bonds in euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcement of the PEPP. This occurred after these term premia had risen in response to a prior monetary policy press conference statement by the ECB president that the ECB was "not here to close spreads".