Question

Two countries have the same currency and central bank but their bond yields are different, what is the cause of this?

Answer 1

Ans.

If you are talking about European union, then yes members of EU have same currency Euro and European central bank . ECB (European Central bank) sets policy for whole European union and not for single country. Each respective country has its central bank like Germany has Bundesbank , central bank of Italy is Bank of Italy etc. so each economy has its own central bank. The ECB sets the monetary policy for whole European union, and the respective central banks of each economies integrates with ECB and domestic financial system. The reason why the bond yields are different in each member states of EU (although they share same currency and ECB ) is due to the fact that ECB doesn’t fuction as lender of last resort and do not guarantee debt of members of Unions. This gets reflected as why bond yields in Germany is negative and why they are high in Greece and Italy. For individual economies like USA or japan, there central bank act as lender of last resort to save financial system during crisis and can set independent monetary policy, which is not posible in European Union. Germany is strong economy of EU, which gets reflected in its government bond yields, whereas Italy , Greece are heavily indebted countries with Debt exceeds 100 % of GDP . higher debt countries usually have higher yield on there bonds. It was only in 2011-2012 the ECB has to intervene to protect the Euro system as some countries are on verge of bankruptcy. This is what lead ECB to intervene in bond market of each country to reduce volatility in markets and push down bond yields. Economies like Italy too have negative yield rate, which does not mean that Italy is doing well but the ECB is intervening to protect the whole Euro System.