Convergence behavior of sovereign bond yields in the EU and COVID-19 government responses

Abstract

This paper aims to investigate the convergence pattern of sovereign bond yields in European Union (EU) countries during the Covid-19 pandemic. To this purpose we employ the Phillips and Sul convergence methodology. We further test whether the above pattern was affected by the intensity of government responses against the Covid-19 dispersion. Our findings indicate the existence of two convergence clubs. Both clubs are composed of countries that have previously been classified as either ‘core’ or ‘periphery’ countries, indicating that in this particular health crisis, this classification is too simplistic. Moreover, our results suggest that the intensity of Covid-19 containment policies had little to no effect in shaping the convergence pattern of sovereign bond yields in the EU. These conclusions are robust even after accounting for the size of the fiscal sector of each country.