Heterogeneity of the determinants of euro-area sovereign bond spreads; what does it tell us about financial stability?

In this paper we assess the movements of euro area sovereign bond yield spreads vis-à-vis the German Bund as processes specified across different levels of volatility and subject to movements in asset prices and economic conditions. The determinants we use are grouped into domestic and euro-area aggregates, thus allowing us to derive results on their relative explanatory power for movements in spreads and compare them across time and the spectrum of countries. We find that volatility influences the deterministic processes of the euro area sovereign spreads and that identical determinants have effects on spreads that vary considerably across countries. Furthermore, we find that economic sentiment indices are the most important determinants and their significance remains, to a large extent, even when controlling for the debt-to-GDP ratio.