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Bond Yield Spreads and Country Risk: A Lasting Relationship?
Credit and Capital Markets – Kredit und Kapital, Vol. 35 (2002), Iss. 2 : pp. 193–215
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Bert Scholtens, Groningen
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Abstract
Bond Yield Spreads and Country Risk: A Lasting Relationship?
This paper investigates whether bond yield spreads reflect country risk. As bond prices and bond yields are determined in the secondary market, bond yields and their spread vis-a-vis US Treasury bonds might provide a continuous and a more reliable information base than traditional measures of country risk. We show that there is a strong relation between changes in the bond yield spread and changes in country risk. Secondary market analysis appears to be a promising additional tool in country risk analysis. However, an important drawback of the bond yield spread as an indicator of country risk appears to be the limited stability of the relationship through time. (JEL F21, F34, G14, G15)