The Impact of the Russo-Ukrainian War on the International Sovereign Debt Market: The Role of Trade Channel

Abstract

The paper quantifies the impact of the outbreak of the Russo-Ukrainian war on sovereign bond yields for 58 countries. Our findings based on event study methodology and multivariate cross-sectional regression analysis highlight the salient role of trade channel in shaping the markets’ reaction to the hostilities. The uptick in yields was higher in countries with a greater share of agricultural raw materials imports from Ukraine. No other persistent cross-geography differences in market reactions were found. The strength of the reaction was contingent on the individual countries’ macroeconomic conditions. The post-event cumulative abnormal returns exhibited a positive associative link with the baseline inflation in the studied countries pointing to the inflationary pressure portended by the outbreak of war. No statistically significant links between the ex ante situation on the labor market and the subsequent bond market reaction were observed. At the outset of hostilities, the dynamics of yields were driven by the perceived likelihood of escalation, while at later stages, the trade channel appears to have shaped the market response. The paper provides insights into the factors shaping the spillover effects of the war on fixed-income markets and quantifies the speed of market adjustment in response to an external shock.