Determinants of long-term yields: A panel data analysis of major countries

Abstract

We utilize cross-country panel data to investigate the determinants of long-term bond yields. To address endogeneity, we use forward interest rates and various forecasts of economists and international organizations. Our result suggests that when an increase in government debt is financed entirely by foreign borrowing, the increase in the forward real interest rate is around three times that when financed domestically. We also find that expectations for aging lower yields. On the other hand, the effect of primary balance is insignificant. Current account balance provides no additional information beyond net foreign debt. We discuss implications of these findings for Japan's and US yields.