The South African–United States sovereign bond spread and its association with macroeconomic fundamentals

The yield spread of South African to United States 10‐year government bonds over the last 5 years has increased substantially to levels approaching those last seen during the mid‐1980s. This paper examines the association between the spread and macroeconomic fundamentals over the 1960–2019 sample pe...

Full description

Saved in:
Bibliographic Details
Published in:The South African Journal of economics 2021-12, Vol.89 (4), p.499-525
Main Author: Fedderke, Johannes W.
Format: Article
Language:English
Subjects:
Appreciation
Bias
Bonds
Economic analysis
Economic growth
Government bonds
Inflation
macoreconomic fundamentals
Macroeconomics
Private sector
Public debt
South Africa
sovereign bond spreads
State
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The yield spread of South African to United States 10‐year government bonds over the last 5 years has increased substantially to levels approaching those last seen during the mid‐1980s. This paper examines the association between the spread and macroeconomic fundamentals over the 1960–2019 sample period, under the GARCH and GARCH‐M class of estimators. We find that higher South African economic growth, lower inflation, public and private debt, as well as rand–dollar appreciation are all associated with a statistically significantly lower South African–United States yield spread. The strongest impact is associated with the public debt‐to‐GDP ratio. Mean spread levels do not appear to be influenced by yield volatility. Finally, while there is no evidence of sign bias in the impact of shocks on yield volatility (negative shock impacts are no different than positive), there is evidence of size bias for both positive and negative shocks: larger shocks have a larger impact on volatility than small, regardless of their sign. Collectively, and even ignoring the impact of private sector leveraging, South Africa’s performance in these macroeconomic fundamentals is associated with an increase in the South African–United States yield spread of 363 basis points (since 2012).
ISSN:0038-2280
1813-6982
DOI:10.1111/saje.12294