Abstract

Government bond’s yield levels vary across countries. In the medium term they depend on the credit risk taken by investor in a given bond. In a very short period it is affected by liquidity risk, and in the long term it is influenced by political risks. Credit risk for investors in government bonds depends on the macroeconomic fundamentals in a given national economy. The factors that influence the size of the credit risk, and then the level of the government bond’s yield can be combined into six groups: variables that indicate the results of economic growth, the external balance, the capital market, fiscal balance and internal balance (inflation) as well as the size of the country.

Taking into account a sample of 23 countries from all over the world and the period from 2009 to 2012, government bonds’ yield dynamics were mostly affected by the increase in the percentage of public debt to GDP (0.54 elasticity) and by the decline in the stock market index (elasticity is -0.49). The effect was slightly smaller when changing the growth rates of unemployment (elasticity of 0.34 with a one year time lag), significantly smaller when changing the Central Bank interest rate dynamics (0.21 elasticity) and very small when changing the percentage of current account balance of payments to GDP (0.04 elasticity). The dynamics of government bonds’ yield level were also influenced (positive sign) by the size of the country (population). In the period of latent deflation crises (2009–2012) there was no impact by inflation.

In the period from 2009 to 2012, the required yield of government bonds was strongly affected by fiscal balances in the EU Member States (0.47 elasticity), much less in the largest countries of the world (0.17 elasticity), and statistically insignificant in the most economically developed countries. On the other side, the dynamics in government bonds’ yields in the most economically developed countries was highly affected by changes in the unemployment rate (2.88 elasticity), as well as changing in the stock markets (-0.87 elasticity). It is obvious that the demand for bonds of most developed countries depends on economic growth and the dynamism of the capital market in their national economies. Government bonds’ yields of the world’s largest countries were relatively strongly influenced by the Central Bank interest rate dynamics (0.29 elasticity) and also by the dynamics in the share of current account balance of payments in GDP (the elasticity is -0.12; this is twice as the result for developed countries).

Keywords

Bonds, Yield, Public debt, International financial markets, Macroeconomics

JEL

E43, E44, E47, E65, F32, F34, F41, G15, H63