Government bond Yield Spreads of PIIGS Countries versus Germany

The main objective of the paper is to study to what extent the evolution of government bond yield differentials of PIIGS countries versus Germany are driven from markets’ perception of credit risk as it is captured by idiosyncratic risk factors or international risk ones. Mine empirical evidence suggests that the key determinant of yield spreads is changes in international risk factors as they measured by the US low rated corporate bonds relative to US Treasury bonds. Domestic risk factors play a minor role. However after the financial crisis idiosyncratic risk factors are highly associated with government bonds differentials. As a consequence of the augmented risk aversion observed the last years; international risk factors amplified their impact in evaluating yield spreads.