DP16365 International Yield Co-movements

Author(s): Geert Bekaert, Andrey Ermolov
Publication Date: July 2021
Keyword(s): cross-country co-movement, Expected inflation, Inflation Risk Premium, liquidity premium, real yield, Sovereign bonds, Treasuries
JEL(s): E31, E43, G12, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16365

We decompose long-term nominal bond yields into real and inflation components in an international context using inflation-linked and nominal bonds. In contrast to extant results, real rate variation dominates the variation in inflation-linked and nominal yields. Cross-country nominal and inflation-linked yield correlations have declined since the Great Recession. Real rates are the main source of the correlation between nominal yields. Our results are robust to various alternative measurements of inflation expectations and the liquidity premium. They continue to hold when a no-arbitrage term structure model with real, nominal, and inflation factors is used to effect the yield decomposition.