The impact of fiscal positions on government bond yields in CEE countries

•Government debt and primary deficit have a positive impact on long-term government bond yields in 10 Central and Eastern European countries.•A one percentage point increase in the stock of government debt is associated with an increase in government bond yields of 2.7-4 basis points.•A one percentage point increase in the primary deficit/GDP ratio is associated with a rise in government bond yields of 12.9-24.3 basis points.•The relationship between government debt and bond yields is non-linear and the threshold is significantly lower than in advanced economies.

This paper investigates the influence of government debt and primary balance on long-term government bond yields in 10 Central and Eastern European (CEE) countries in the period 2000-2013. The results indicate that a one percentage point increase in the stock of government debt is associated with an increase in government bond yields of 2.7-4 basis points, while a one percentage point increase in the primary deficit to GDP ratio is associated with an increase in government bond yields of 12.9-24.3 basis points. We also find evidence of non-linearities in the debt-interest rate relationship, whereby the threshold after which the impact of debt turns from negative to positive is significantly lower than in advanced economies.