This paper assesses how forecasting experts form their expectations about future
government bond spreads. Using monthly survey forecasts for France, Italy and the
United Kingdom between January 1993 and October 2014, we test whether respondents consider the expected evolution of the fiscal balance—and other economic fundamentals—to be significant drivers of the expected bond yield differential over a benchmark German 10-year bond. Our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads. This suggests that credible fiscal plans affect market experts’ expectations and reduce the pressure on sovereign bond markets. In addition, we show that expected fundamentals generally play a more important role in explaining forecasted spreads compared to realized spreads.
Original languageEnglish
Place of PublicationWashington
PublisherInternational Monetary Fund
Number of pages46
ISBN (Electronic)9781484362068/1018-5941
StatePublished - 20 May 2016

Publication series

NameIMF working paper series
PublisherInternational Monetary Fund

    Research areas

  • bond markets, Forecasting

ID: 25340376