Sovereign Bond Spreads and the Pricing of Sovereign Debt in the Eurozone : A Macroeconomic Fundamentals Approach

This paper investigates and models the yield spreads of sovereign debt of Eurozone countries by means of macroeconomic fundamentals. In particular, this paper shows that the change in the volatility of terms-of-trade of trade outside the Eurozone was a factor in capturing a significant part of the variation of sovereign debt spreads. This paper finds that a 1 percentage point increase in the volatility of terms-of-trade outside the union is associated with a 0.23 percentage point increase in yield spreads. The explanatory power for volatility of terms-of-trade for trade outside the union is substantial, even when controlling for both regional and global factors. This is the first paper to differentiate the volatility of terms-of-trade in this manner for the Eurozone, and presents important findings for fixed income investors