Working Paper no. 123
By Andrew Clare and Ilias Lekkos
It is frequently suggested that the globalisation of financial markets has been responsible for reducing the scope for independent monetary policy action by strengthening the relationship between national fixed income markets. An associated concern is that the linkages between these markets become stronger in times of financial market stress. In this paper we decompose the relationship between the government bond markets of Germany, the United Kingdom and the United States. We find that the yield curves for each of these markets are influenced by international factors. Furthermore the impact of these factors increases significantly during times of financial stress. We also find that while the total covariation between these markets is relatively stable, components of the covariance can vary substantially over time.