Are government bonds still safe havens in the context of COVID-19?

ABSTRACT

This study analyzes whether government bonds can act as safe havens in the context of COVID-19. Using a panel fixed effect model, data were collected for both advanced and emerging market economies from March 11, 2020, to June 30, 2021. Robustness tests were used to add to the credibility of the findings. Our evidence supports that government bonds maintained their safe haven status during the COVID-19 pandemic. Hence, investors can still use government bonds to hedge financial market risks in the uncertain environment associated with this pandemic. Additionally, the negative effects of the COVID-19 pandemic on government bond yields in emerging economies are larger than in advanced economies. Therefore, policymakers’ measures should focus on reducing COVID-19 cases to alleviate panic and diminish economic fluctuations, especially for emerging economies. Regulators can also use short-term interest rates to guide market capital flow to avoid a liquidity crisis, reducing financial stress and market uncertainty.

KEYWORDS:

• COVID-19
• government bonds
• safe haven
• panel data

JEL CLASSIFICATION:

• C23
• E43
• E44
• G15

Data Availability statement

The data that supports the findings of this study are openly available at: https://figshare.com/s/e71b889fd082be642abe, doi: 10.6084/m9.figshare.15123843.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. These economies’ long-term government bond yields and short-term Treasury bill rates were available.

2. We performed the Hausman test to reject the null hypothesis that equation (1)(1) $GB10Y_{it}={\beta }_0+{\beta }_{1}ln(n{c}_{it})+{\beta }_{2}TB3M_{it}+{\beta }_{3}ln(s{t}_{it})+{\beta }_{4}ln(s{v}_{it})+fixedeffects+{\epsilon }_{2it}$(1) should be based on random effects (Table 3).

3. The variable nc is expressed in equation (1)(1) $GB10Y_{it}={\beta }_0+{\beta }_{1}ln(n{c}_{it})+{\beta }_{2}TB3M_{it}+{\beta }_{3}ln(s{t}_{it})+{\beta }_{4}ln(s{v}_{it})+fixedeffects+{\epsilon }_{2it}$(1) : ln(nc_it) = ln(1+ nc_it) to avoid missing data caused by ln (0) being undefined. Logarithmic form also controls for population differences among countries.

4. The Euro against each country’s currency was used to unify the measurement of exchange rates. Currencies other than the Euro can also be employed as long as the measurement of exchange rates is identical.

Additional information

Funding

This research received no external funding.