Virus will complicate Central Europe’s policy dilemmas

Significance Surging inflation across CE has coincided with a rapid worsening of current-account balances, particularly in Hungary, putting the region’s currencies under strain. It has exposed the vulnerability of CE government bond markets, with yields, particularly real yields, remaining at excessively low levels. Impacts The era of low bond yields and low currency volatility in CE may have run its course. A full-fledged CE currency crisis is unlikely: Poland, Hungary and the Czech Republic are still among the most resilient emerging markets. Hungary’s crucial elections in early 2022 will reduce the scope for fiscal tightening, making policy dilemmas more acute. EU concerns about the rule of law in Poland and Hungary threaten funds earmarked for both but have had little impact on market sentiment.

International Evidence on Extending Sovereign Debt Maturities

Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance by examining the extension of the maximum maturity of issued debt. In particular, we examine the potential costs to the U.S. Treasury of introducing 50-year bonds as a financing option. Based on evidence from foreign government bond markets with such long-term debt, our results suggest that a 50-year Treasury bond would likely trade at an average yield that is at most 20 basis points above that of a 30-year bond. Our results based on extrapolations from a dynamic yield curve model using just U.S. Treasury yields are similar.

Integration and Disintegration of EMU Government Bond Markets

It is commonly found that the markets for long-term government bonds of Economic and Monetary Union (EMU) countries were integrated prior to the EMU debt crisis. Contrasting this, we show, based on the interrelation between market integration and fractional cointegration, that there were periods of integration and disintegration that coincide with bull and bear market periods in the stock market. An econometric argument about the spectral behavior of long-memory time series leads to the conclusion that there is a stronger differentiation between bonds with different default risks. This implied the possibility of macroeconomic and fiscal divergence between the EMU countries before the crisis periods.