NURUL AIN NABILA BINTI MOHD SABRI

2021178749
JBA2514B
MISS NADIA NURUL NAJWA BT MOHMAD HASSAN

STUDY ON
SOVEREIGN BOND SPREADS
1. WHAT IS SOVEREIGN BOND SPREADS

Sovereign bond spreads is the interest rate paid

by the government or sovereign entity issuing
the debt instrument to the bond buyer.
Sovereign bond spreads are influenced by credit
risk rating of the issuing government, currency
exchange rate risk, and local interest rates.

2. WHY THIS TOPIC IS IMPORTANT

Sovereign bond spreads are beneficial to

investors because they can be used to
evaluate the credit markets and the
economy. When the spread between two
bonds widens, for example, it indicates that
junk bonds are more likely to default.

JURNAL

RATE, EXCHANGE, COUNTRY, BOND,

exchange rate regimes, ECT, FOREIGN,
Developing Countries, Exchange Rate Policy, Bond
Spreads in Developing
control variables PURPOSE
We conduct a multistage estimation of the Heckman
selection model utilising a set of instrumental
to empirically examine how exchange rate
variables to address the endogeneity problem for
policy affects the issuing and pricing of
exchange rate regimes and real overvaluation. We
foreign debt for developing countries
discovered that adjusting for endogeneity had no
effect on the quality of our results.

METHODOLOGY, ANALYIS AND DATA COLLECTION

data used are from Capital Dataís Bondware and contains
detailed terms of bonds issued in the primary markets by 42
developing countries between January 1990 and December 2006

FINDINGS DATA LIMITATION OF STUDY

The exchange rate regime chosen has a
significant impact on emerging countries'
external borrowing. In particular, the less
flexible a country's currency rate regime is,
the less likely it is to issue foreign bonds and
the larger the margins it must pay.
Our results, therefore, unambiguously point
to the adverse affect of a exchange rate
regime on a foreign debt which is consistent
with the conclusions from
 JURNAL

SOVEREIGN, SPREAD, COUNTRY, ESG

performance, RISK, DEBT, FINANCIAL, Sovereign
bond yield spreads, sovereign bond spreads, sovereign risk
VARIABLE
OBJECTIVE
We use two variables to evaluate a
We investigate whether and how a
country's fiscal situation: total
country's environmental, social, and
public debt and primary balance,
governance (ESG) performance
both in relation to GDP.
influences its sovereign borrowing
rates on international capital markets.
We believe that ESG performance has
an economic impact.
FINDINGS
A rising number of studies have
METHODOLOGY looked into using qualitative
Bloomberg provides information on
characteristics as potential
government bond yields. Sovereign bond
predictors of sovereign bond
spreads are calculated as the difference
between the interest rate a country pays on spreads.
its external US dollar–denominated debt and
the rate given by the US Treasury on debt
with equivalent maturities.
LIMITATION
OF STUDY
Many governments and investors have sought a better understanding of
sovereign risk and its influence on investment returns, particularly since the
European sovereign debt crisis. Some commentators think that sustainability
should be included in analysis and policy as part of this trend toward broader
risk analysis.

JURNAL

BOND, SPREAD, FUNDAMENTAL, COUNTRY,

MARKET, CRISIS, RISK, sovereign bond, pricing of G7
sovereign, sovereign debt crisis
to what extent market prices reflect fundamentals, and
how this has changed over time. To get at the evolution
of pricing patterns, the model employed in this paper
PURPOSE allows for time variation in the coefficients, which evolve
as random walks, and stochastic volatility in the error
term.

This method imposes an untested restriction on the

econometric model's coefficients, namely that the
RELATIVE
fundamentals in both countries are equally important in
determining the spread, and it turns out that loosening
this restriction leads to a much better understanding of VARIABLE

the underlying pricing mechanisms.

The data spans the years of May 1993 to December 2011.

The sample period, frequency, and set of nations reflect
METHODOLOGY
the availability of macroeconomic fundamentals
projection data from Consensus Economics. Each
country has 224 observations in the dataset.

Positively associated with risk aversion, as

less secure corporations are anticipated to
pay a higher premium than safer FINDING

corporations in a more risk averse market.

Using time-varying parameter stochastic volatility

models, researchers examined the determinants of
LIMITATION OF G7 sovereign bond spreads. This contrasts with the
great majority of previous research, which has
STUDY
focused on developing market economies or
eurozone countries.
 JURNAL JURNAL

4 5

RISK, SOVEREIGN, SPREAD, COMMODITY, PRICE, COUNTRY,

PAPER, CRISIS, FUNDAMENTAL, POLITICAL, commodity price,
EUROPEAN, ECB, pricing of G7 DATA, EXPORT, international
sovereign bond, sovereign bond commodity price, Sovereign
spreads Bond Spreads, commodity
exporting
PURPOSE OBJECTIVE
to give insight on the factors that Using panel data for 38 emerging
influence sovereign bond spreads market economies from 1997 to
in G7 countries, with a focus on 2007, researchers examined the
the significance of global risk impact of revenue windfalls from
aversion and macroeconomic international commodities price
fundamentals, as well as their booms on sovereign bond
evolution over time spreads.

PROXY
The spread should be
determined by comparing the
risk of a potential investment
ratings to capture long-run and thus
to the risk-free rate.
VARIABLE
to make the outcomes of the
regression analysis easier to
understand We utilise average
polity and checks and balances
more fundamental disparities in
countries' political systems.

METHODOLOGY
The sample period and country set
reflect the availability of
macroeconomic fundamentals
projection data from Consensus
Economics. Each country has 224
observations.
METHODOLOGY
The Emerging Markets Bond Index
Global provided us with data on
sovereign bond spreads. The bond
spreads are period averages for the
entire year, evaluated against a
comparable US government bond.

FINDINGS
Positively associated with risk
aversion, as less secure
corporations are anticipated to
pay a higher premium than safer
corporations in a more risk
averse market.
LIMITATION
OF STUDY
Further from controlling for exchange
rate risk and analysing liquidity risk
and general risk asymmetry effects of
nations' fundamentals on yield
spreads by entering the fundamentals
of each countries separately defining
the spread
FINDINGS
In democracies, commodity
price booms result in a
considerable decrease in the
sovereign bond spread, but in
autocracies, the spread
increases significantly.
LIMITATION
OF STUDY
The empirical analysis is based on a
limited time frame. The 1970s and
1980s should be included in any
empirical study of the effects of
commodities price booms on
sovereign bond spreads.
 SUMMARIZE

Investors and policymakers

must understand how
international commodity price
shocks, which cause substantial
ups and downs in foreign
currency income in emerging
market countries, affect
sovereign bond spreads.

SIMILARITY Some countries' borrowing rates

have consistently outpaced those
of more highly laden countries. As
a result, a portion of the spread is
unaccounted for, and spreads
appear to be bigger than they
should be based only on
fundamentals.
The fundamentals of the
countries that define a spread
are equally essential in defining
the spread. Relaxing
restrictions, it turns out, leads to
a much greater knowledge of
the underlying price dynamics.

CONCEPT OF THE
JURNALS
The interest rates Inflation is usually
of countries are prevented by a
influenced by the stronger currency,
relationship whereas inflation is
between currencies boosted by a
and bond spreads. Currency price weaker currency.
action can be
influenced by
monetary policy Investors can
Currency exchange
and interest rates. forecast and profit
rates can have an
from currency swings
impact on central
by knowing and
banks' monetary
studying the links
policy decisions
between currencies
around the world.
and central bank
decisions.

references
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01. V. Z. (2013). Exchange rate
policy and sovereign bond
spreads in developing
countries. Journal of Money,
Credit and Banking, 45(7),
1275-1300.
D'Agostino, A., & Ehrmann,
02. M. (2013). The pricing of G7
sovereign bond spreads: The
times, they are a-changin.
03. D’Agostino, A., & Ehrmann,
M. (2014). The pricing of G7
sovereign bond spreads–The
times, they are a-changin.
Journal of Banking & Finance,
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Capelle-Blancard, G., Crifo,
04. P., Diaye, M. A., Oueghlissi,
R., & Scholtens, B. (2019).
Sovereign bond yield spreads
and sustainability: An
empirical analysis of OECD
countries. Journal of Banking
& Finance, 98, 156-169.
Arezki, R., & Brückner, M.
05. (2012). Resource windfalls
and emerging market
sovereign bond spreads: The
role of political institutions.
the world bank economic
review, 26(1), 78-99.