DOI: https://doi.org/10.52903/wp2022301
A GLOBAL MONETARY POLICY FACTOR IN SOVEREIGN BOND YIELDS
Dimitris Malliaropulos
Bank of Greece and University of Piraeus
Petros Migiakis
Bank of Greece
Abstract
We document the existence of a global monetary policy factor in sovereign bond yields, related to the size of the aggregate balance sheet of nine major central banks of developed economies that have implemented programs of large-scale asset purchases. Balance sheet policies of these central banks reduced the net supply of safe assets in the global economy, triggering a decline in global yields as investors rebalanced their portfolios towards more risky assets. We find that central banks’ large-scale asset purchases have contributed to significant and permanent declines in long-term yields globally, ranging from around 330 bps for AAA-rated sovereigns to 800 bps for non-investment grade sovereigns. The stronger decline in yields of high-risk sovereigns can be partly attributed to the decline in the foreign exchange risk premium as their currencies appreciated. Global central bank asset purchases during the Covid-19 crisis have more than counterbalanced the effects of expanding fiscal deficits on global bond yields, driving them to even lower levels. Our findings have important policy implications: normalizing monetary policy by scaling down central bank balance sheets to pre-crisis levels may lead to sharp increases in sovereign bond yields globally, widening spreads and currency depreciations of vulnerable sovereigns with severe consequences for financial stability and the global economy.
Keywords: quantitative easing; central bank balance sheet policies; sovereign risk; interest rates; panel cointegration
JEL-classifications: E42; E43; G12; G15
Acknowledgements: We thank Hiona Balfousia, Kostas Mavromatis, Ricardo Reis, Dimitri Vayanos, participants of the 50th Anniversary Money Macro and Finance Conference at the London School of Economics and Political Science and four anonymous referees for helpful comments. The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece or the Eurosystem.
Correspondence:
Petros Migiakis
Bank of Greece
21 El. Venizelou Ave.
Athens, 10250
email: pmigiakis@bankofgreece.gr