Analysis of the structure of Eurozone yield curves

Abstract

This paper undergoes an empirical analysis of the sovereign bond yield spread determinants in six Euro Area countries in the period between the first quarter of 2000 until the second quarter of 2012. The main focus of this study is to determine which variables have led to inconsistent yield curve spreads, and if the impact of these variables differ among the respective countries. The paper finds that the risk aversion variable has played a major role in explaining government bond yield differentials in the Euro Area particularly for countries with smaller economies. Additionally, the effect of fundamental factors on bond yield spreads has been proven to significantly increase during the crisis (from the fourth quarter of 2008 onwards) for high debt periphery countries, in this study Greece, since investors started discriminating more between countries. These conclusions are useful for policymakers in order to address sovereign yield divergences. However, the increased risk awareness amongst investors and also the negative impact of the recent crisis on Eurozone states' finances are expected to hinder the sovereign bond yield spreads from returning to pre-crisis period levels.