Co-movement and global factors in sovereign bond yields

Abstract

We study the co-movement in international zero-coupon government bond yields using a recently proposed methodology by Choi et al. (2018) and Choi et al. (2021) for the estimation of multilevel factor models. We employ a readily available non-proprietary dataset coupled with open-source code which facilitates reproduction of the results but also comparability with the existing bibliography. The ten countries dataset is cross-sectionally expanded to eleven countries with newly constructed data series on the term structure of Greek constant-maturity, government zero-coupon bond rates. We find that the country pair US-Germany is most suitable as an initial candidate for global factor estimation. We confirm that three global factors account for most of the variation in zero-coupon bond yields leaving a small proportion to be (contemporaneously) explained by local factors. Global inflation and global real activity are related to the global level and slope factors. The third global factor, “curvature,” is strongly related to economic/financial uncertainty linked to systemic risk stemming from the US financial markets. JEL classification numbers: C10, E43, G12, G15. Keywords: Sovereign bonds; Yield curve; Term structure; Multilevel factor model; Global factors; Local factors.