Sovereign Spreads and Economic Fundamentals: An Econometric Analysis

24 Pages Posted: 30 May 2023

Date Written: September 21, 2022


This paper provides an estimate of the fair value of the Italian ten-year sovereign spread, defined as a value consistent with the country’s macroeconomic fundamentals. It uses a multi-country model in which the spreads of the government bond yields of Italy, France and Spain with respect to the German bond yield are regressed on a set of fundamental macroeconomic variables and a set of variables approximating the risk perception of investors, for the period January 2007 – June 2022. The results show that, in the last ten years, the observed level has often been above the fair value, with significant upward deviations during periods of market tensions and/or political uncertainty. The dynamics of the debt-to-GDP ratio and those of expected growth show, respectively, a positive and a negative relationship with the trend of the fair value. In the last two years, expected inflation has also played an important role: while its decline exerted a downward effect on the fair value in 2020 and for part of 2021, the increase observed since the last quarter of 2021 has led to a rise in the fair value.

Keywords: sovereign bond spread, macroeconomic fundamentals, risk aversion

JEL Classification: E44, G15, H63

Suggested Citation

Ceci, Donato and Pericoli, Marcello, Sovereign Spreads and Economic Fundamentals: An Econometric Analysis (September 21, 2022). Bank of Italy Occasional Paper No. 713, Available at SSRN: or

Donato Ceci

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Marcello Pericoli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma


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