The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Jacopo Cimadomo, Peter Claeys, and Marcos Poplawski-Ribeiro
INTERNATIONAL MONETARY FUND
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.