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German Bond Yields and Debt Supply: Is There a “Bund Premium”?

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  • Anne-Charlotte Paret
  • Miss Anke Weber

Abstract

Are Bunds special? This paper estimates the “Bund premium” as the difference in convenience yields between other sovereign safe assets and German government bonds adjusted for sovereign credit risk, liquidity and swap market frictions. A higher premium suggests less substitutability of sovereign bonds. We document a rise in the “Bund premium” in the post-crisis period. We show that there is a negative relationship of the premium with the relative supply of German sovereign bonds, which is more pronounced for higher maturities and when risk aversion proxied by bond market volatility is high. Going forward, we expect German government debt supply to remain scarce, with important implications for the ECB’s monetary policy strategy.

Suggested Citation

  • Anne-Charlotte Paret & Miss Anke Weber, 2019. "German Bond Yields and Debt Supply: Is There a “Bund Premium”?," IMF Working Papers 2019/235, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/235
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    References listed on IDEAS

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    Cited by:

    1. Dennis Bonam, 2020. "A convenient truth: The convenience yield, low interest rates and implications for fiscal policy," Working Papers 700, DNB.
    2. International Monetary Fund, 2022. "Denmark: Selected Issues," IMF Staff Country Reports 2022/170, International Monetary Fund.
    3. Michele Anelli & Michele Patanè & Mario Toscano & Alessio Gioia, 2021. "The Evolution of the Lead-lag Markets in the Price Discovery Process of the Sovereign Credit Risk: the Case of Italy," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(2), pages 1-7.

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