Abstract
Using currency swap rates, I measure US dollar-denominated benchmark government bond yields for Australia, Canada, Germany, Japan, Switzerland, and the UK. All countries pay large and variable yield premiums, or spreads. Like those of Emerging Markets, the industrial country sovereign spreads I measure are highly correlated across countries and increase sharply in the fall of 1998. Harnessing recent advances in data availability, I investigate the degree to which they can be explained by: (i) default risk, (ii) liquidity premiums, and (iii) segmented markets. Proxy variables for each explain nearly three-quarters of the variation in de-meaned sovereign spreads but signs are inconsistent with the default risk and liquidity premium explanations. Even the world's largest bond markets appear segmented. Credit risk and liquidity constraints limit arbitrageurs' ability to eliminate yield differences that result.
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