On the Comovement of Bond Yield Spreads and Country Risk Ratings

Abstract

This article investigates whether bond yield spreads are suitable for analyzing country risk. As bond prices and bond yields are determined in the secondary market, bond yields and their spreads vis-à-vis U.S. Treasuries may provide a more continuous and reliable information base than traditional measure of country risk. In more than a dozen countries, we study the association between the yield spread and the Institutional Investor country rating in the mid-1990s. Rank correlations show that bond yields are a good reflection of country risk.