Comovements in Government Bond Markets : A Minimum Spanning Tree Analysis

The concept of a minimum spanning tree (MST), based on graphing theory, is used to study patterns of comovements for a set of twenty government bond market indices for developed North American, European, and Asian countries. We show how the MST and its related hierarchical tree evolve over time and describe the dynamic development of market linkages. Over the sample period, 1993-2008, linkages between markets have decreased somewhat. However, a subset of European Union (EU) bond markets does show increasing levels of comovements. Within this subset the French, rather than the German, bond market more frequently assumes a central role. This casts into question the frequent use of the German market as a “benchmark.” The evolution of distinct groups within the Eurozone is also examined. The implications of our findings for portfolio diversification benefits are outlined