Bond Convenience Yields in the Eurozone Currency Union

Jiang, Zhengyang; Lustig, Hanno; Nieuwerburgh, Stijn Van; Xiaolan, Mindy Z.

doi:10.2139/ssrn.3797321

Cited by 10 publications

(17 citation statements)

References 40 publications

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“…In line with this interpretation, Augustin, Sokolovski, Subrahmanyam, and Tomio (2021) find a positive and significant sensitivity of sovereign CDSs to the intensity of the Covid-19 spread for fiscally constrained governments, suggesting that sovereign resilience to external shocks was impaired. Jiang, Lustig, Van Nieuwerburgh, and Xiaolan (2021) relate euro area convenience yields to countries' fiscal positions. Finally, the strong policy response at the European level may have lowered political risks in vulnerable countries, facilitating lower redenomination risk premia.…”

Section: Event Study Resultsmentioning

confidence: 99%

“…fiscal policy announcements as potentially reflecting market participants' assessment that expansive fiscal policy can play an important role in supporting monetary policy aimed at improving the economic outlook, which in turn improves debt sustainability (including debt-to-GDP metrics; see Bartsch, Benassy-Quere, Corsetti, and Debrun (2021)). In addition, the fiscal policy may have supported vulnerable countries by removing fiscal risk from weakened sovereign budgets onto shared budgets, facilitating lower default risk premia (Augustin, Sokolovski, Subrahmanyam, and Tomio (2021)) and more negative convenience yields (Jiang, Lustig, Van Nieuwerburgh, and Xiaolan (2021)). Finally, the observed strong policy response at the European level may have contributed to lowering national political risks, rationalizing lower redenomination risk premia.…”

Section: Introductionmentioning

confidence: 99%

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Euro Area Sovereign Bond Risk Premia During the COVID-19 Pandemic

2021

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We decompose euro area sovereign bond yields into five distinct components: i) expected future short-term risk-free rates and a term premium, ii) default risk premium, iii) redenomination risk premium, iv) liquidity risk premium, and a v) segmentation (convenience) premium. Identification is achieved by considering sovereign bond yields jointly with other rates, including sovereign credit default swap spreads with and without redenomination as a credit event feature. We apply our framework to study the impact of European Central Bank (ECB) monetary policy and European Union (E.U.) fiscal policy announcements during the Covid-19 pandemic recession. We find that both monetary and fiscal policy announcements had a pronounced effect on yields, mostly through default, redenomination, and segmentation premia. While the ECB's unconventional monetary policy announcements benefited some (vulnerable) countries more than others, owing to unprecedented flexibility in implementing bond purchases, the E.U.'s fiscal policy announcements lowered yields more uniformly.

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Section: Event Study Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Euro Area Sovereign Bond Risk Premia During the COVID-19 Pandemic

2021

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“…They find that 53 percent of the outstanding public debt in 2018 is accounted for by the debt revenue term. For the countries in the eurozone, Jiang et al (2021) find that the variation in the relative convenience yields explains most of the variation in sovereign yields across different countries. They estimate conservatively that since the start of the euro two decades ago, Spain and Italy have earned between 5 percent and 8 percent of GDP less than Germany in debt revenue.…”

Section: Figure 1 the Flow Budget Components As A Ratio Of Gdp For Th...mentioning

confidence: 87%

Debt Revenue and the Sustainability of Public Debt

Reis

2022

Journal of Economic Perspectives

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While public debt has risen in the last two decades, the return that it offers to investors has fallen, especially relative to the return on private investment. This creates a revenue for the government as the supplier of the special services offered by public bonds, which include storage of value, safety, liquidity, and reprieve from repression. The present value of this debt revenue is large relative to the stock of public debt, keeping it sustainable even as the present value of primary balances is zero or negative. It gives rise to different policy tradeoffs than the conventional analysis of primary balances and makes different recommendation on the effects of austerity, the optimal amount of debt, or the spillovers between monetary and fiscal policy.

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“…These differences occur in the aftermath of the sovereign debt crisis in the euro area. This raises important issues for the conduct of fiscal policy in a currency union (Nakamura and Steinsson, 2014;Farhi and Werning, 2016;Corbi, Papaioannou, and Surico, 2018;Jiang et al, 2021). In particular, when uncoordinated fiscal policy is one of the causes for the uneven transmission of monetary policy, then under what conditions can it also rectify the uneven impact of monetary policy?…”

Section: Discussionmentioning

confidence: 99%