Kamin, S., and K. von Kleist, 1999, “The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s,” Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 653.
Laubach, T., 2009, “New Evidence on the Interest Rate Effects of Budget Deficits and Debt,” forthcoming in the Journal of the European Economic Association.
Laubach (2009) identifies the relationship by estimating the effect of long-horizon forward rates (the five-year ahead 5- or 10-year forward rates) and future deficits projected by the Congressional Budget Office (under the assumption of unchanged laws and policies). He finds an effect of 3-4 basis points per one percentage point increase in the debt/GDP ratio. Engen and Hubbard (2004) test an array of specifications and conclude that the effect is about 3 basis points.
Consistent with this hypothesis, Kamin and Kleist (1999) find evidence of a positive relationship between three-month U.S. T-bill rates and EM Brady bond spreads.
The results are similar for yields on three- or ten-year Treasury bonds.