Debt Sustainability Measures and Their Explanatory Power for Estimating Government Bond Yields

Abstract

The purpose of this article is to explain changes in sovereign yields using conventional “rating agency style” measures in comparison to contingent claims valuation-based measures. I will show that – in contrast to most conventional sovereign credit quality measures – contingent claims valuation-based credit measures have significant power in explaining the spread between 10-year sovereign yields and the expected future monetary policy rate.

Keywords: Sovereign debt, debt sustainability, contingent claims approach, sovereign long-term interest rates, dynamic panel models

JEL Classification: C23, E62, F34, G13, H63