What Drives Sovereign Bond Yields in the Eurozone?

Sovereign bond yields of the founding countries of the Euro have moved a lot during the last 20 years and not necessarily to the same direction, depending on the issuing country. Yields have turned negative for most of the maturities and (almost) for all founding members of the Euro. This chapter studies the variables that affect the bond yields of these countries. We find evidence that the debt-to-GDP, the real effective exchange rate, the current account balance to GDP, the unemployment rate the stock market volatility index and the total lending to GDP ratio have a positive impact, whereas the GDP growth posts a negative effect on the sovereign bond yields. This means that the fiscal position, along with the external competitiveness, the international risk, the size of the financial sector, as well as the economic activity are important determinants of the bond yields. Furthermore, both the financial and sovereign crises seem to have led to an increase of the yields, whereas the ECB purchase programs resulted in their decrease. The impact appears to be stronger for the euro-denominated versus the non-euro denominated bond yields, as well as for the Southern compared to the Northern countries.