Macroeconomic Fundamentals and the Shape of Sovereign Credit Risk

Abstract

Sovereign CDS spreads price the credit risk embedded in government borrowing. We ask how macroeconomic fundamentals predict that risk, and whether a linear mapping from fundamentals to spreads is adequate. Across a large panel of OECD economies, linear methods perform well across countries but lose predictive accuracy after 2022 and fail to capture how spreads vary across maturities. Non-linear methods recover both. While linear forecasts mainly rely on fiscal ratios, non-linear predictions draw on the term-structure slope throughout, inflation during the 2022–2024 monetary tightening, and consumer confidence during the Eurozone crisis. These predictive relationships hold panel-wide rather than country-by-country.

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Citation

Bianchi, Daniele, and Teng Jiao. Macroeconomic Fundamentals and the Shape of Sovereign Credit Risk. Journal of Financial and Quantitative Analysis, forthcoming.

@article{BJ24,
  author = {Daniele Bianchi and Teng Jiao},
  year = {2026},
  title = {Macroeconomic Fundamentals and the Shape of Sovereign Credit Risk},
  journal = {Journal of Financial and Quantitative Analysis},
  note = {Forthcoming}
}