International Yield Co-movements
102 Pages Posted: 19 Jun 2019 Last revised: 29 Jun 2021
Date Written: June 4, 2021
We decompose long-term nominal bond yields into real and inflation components in an international context using inflation-linked and nominal bonds. In contrast to extant results, real rate variation dominates the variation in inflation-linked and nominal yields. Cross-country nominal and inflation-linked yield correlations have declined since the Great Recession. Real rates are the main source of the correlation between nominal yields. Our results are robust to various alternative measurements of inflation expectations and the liquidity premium. They continue to hold when a no-arbitrage term structure model with real, nominal, and inflation factors is used to effect the yield decomposition.
Keywords: sovereign bonds, cross-country co-movement, real yield, expected inflation, inflation risk premium, liquidity premium
JEL Classification: E31, E43, G12, G15
Suggested Citation: Suggested Citation