Fiscal Policies, Domestic Bond Yields, and Debt Structure: What Role Does Geopolitics Play in Shaping Yields?

“The higher the ICRG rating, the level of domestic bond yields tends to decrease.”

This line, taken from a recent IMF Working Paper, underscores he significance and measurability of geopolitical risk on debt pricing.

Given that domestic sovereign bonds have become a growing source of government financing in emerging markets, the paper investigates the role of fiscal policies in determining domestic bond yields, and how this relationship varies depending on the debt structure.

.Main finding: A 1 percentage point increase in expected primary deficits results in a persistent increase in 10-year domestic bond yield by around 36 basis points over 2.5 years, with larger effects observed during the COVID-19 pandemic.

This contrasts with external bond spreads which are more sensitive to external and global risk factors.

Have a look: (https://www.imf.org/en/Publications/WP/Issues/2025/03/28/Fiscal-Determinants-of-Domestic-Sovereign-Bond-Yields-in-Emerging-Market-and-Developing-565661)

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CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.