Research

Abstract: The literature established that a sovereign bond’s “convenience yield” premium diminishes when that country issues more debt. But how is this convenience yield affected when another country issues sovereign debt? Using high-frequency identification and debt management offices’ communication, we find that an increase in German or French debt reduces convenience yields across the eurozone. Spillovers to low-risk countries are one-for-one while those to riskier countries are smaller. To rationalize these findings, we develop a model with heterogeneous credit risk. Safe sovereign bonds are close substitutes to hedge against idiosyncratic risk, explaining large spillovers, while risky bonds are poor substitutes.