DP7499 Government Bond Risk Premiums in the EU revisited: The Impact of the Financial Crisis

Author(s): Ludger Schuknecht, Jürgen von Hagen, Guido Wolswijk
Publication Date: October 2009
Keyword(s): Bond Markets, Financial Crisis, Sovereign Risk Premiums
JEL(s): G12, G15
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7499

This note looks at US$ and DM/Euro denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads before and during the crisis can largely be explained on the basis of economic principles. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.