Recent market developments by Jorge Sicilia, Chief Economist BBVA Group (May 2014)

Recent market developments.

Jorge Sicilia, Chief Economist BBVA

Foreign Exchange Contact Group

Frankfurt, 6 May 2014


6 May 2014

Financial markets

Macroeconomic outlook

Inflation expectations

Fragmentation and its impact on monetary policy: a comment on forward guidance

Some preliminary remarks on QE

Issues for discussion: challenges

Contents


6 May 2014

Renewed tensions in EMEA have not spread, but still a source of concern for the global and European outlook

Financial tensions Index, Developed vs Emerging marketsSource: BBVA Research

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2011 2012 2013 2014

Latam Emea Emerging Asia Developed (rhs)


6 May 2014

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bps change(rhs) 6-Apr 4-May

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European periphery bond yieldsmonthly and YTD change, bpsSource: Bloomberg and BBVA Research

QE talks lend support to periphery bonds, mostly in the mid and long-end of the curves.

SPAIN ITALY PORTUGAL


6 May 2014

FX: EM´s recent appreciation is fading, while the EUR has yet to price-in “QE talks”.

DXY dollar Index against major peersSource: Bloomberg and BBVA Research

FX vs USD, monthly change, %Source: Bloomberg and BBVA Research

-5 -3 -1 1 3 5

Indonesia

China

India

Hong Kong

Malaysia

Thailand

Taiwan

Philippines

Korea

Chile

Mexico

Argentina

Peru

Brazil

Colombia

Turkey

Russia

Ukraine

Poland

Hungary

Bulgaria

Czech Republic

Romania

ADXY - Asia

LACI - Latam

Japan

Euro

GBP

Dollar (DXY)

Appreciation against the

USD

60

65

70

75

80

85

90

95

100

105

110

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14

BRL Turkey MXN PEN CLP COP ARS EUR

depreciation vs USD


6 May 2014

Capital has been entering into both EM and periphery economies, but inflows are slowing down.

*Grey areas represent last month portfolio flows

Portfolio Flows: current and previous month(Country Flows over total Assets, % )Source: BBVA Research through EPFR data

Led by institutional investors, EM inflows have been positive in April. Yet they have been slowing down in the last three weeks

(mainly those to EMEA).

Led by institutional investors, EM inflows have been positive in April. Yet they have been slowing down in the last three weeks

(mainly those to EMEA).

Very positive inflows into peripheral bonds are also weakening, and turned into

outflows on the week ended on 30 April.

Very positive inflows into peripheral bonds are also weakening, and turned into

outflows on the week ended on 30 April.

-4,0 -3,0 -2,0 -1,0 0,0 1,0 2,0 3,0 4,0

USA

Japan

Canada

UK

Sweeden

Norway

Denmark

Finland

Germany

Austria

Netherlands

France

Belgium

Italy

Spain

Ireland

Portugal

Greece

Poland

Czech Rep

Hungary

Turkey

Russia

Mexico

Brazil

Chile

Colombia

Peru

Argentina

China

India

Korea

Thailand

Indonesia

Philippines

Hong Kong

Singapore


6 May 2014

Financial markets






Contents


6 May 2014

World GDP Growth (% QoQ)based on BBVA-GAINSource: BBVA Research

Global Cycle: growth is still robust but around 0.8%

Overall, higher growth in developed economies partly offsets lower growth in emerging economies

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3Monthsago

Current 3Monthsago

Current

Q2-13 Q3-13 Q4-13 Q1-14 Q2-14

Actual Estimates


6 May 2014

The eurozone: the economic growth gains momentum, as expected

Domestic demand will contribute to the recovery in 2014, especially investment, with resilient private consumption

External support could lessen in the forecast horizon, due to the strength of the euro

Ongoing banking union and subdued financial stress should support the credit recovery in 2015

Eurozone: GDP growth (YoY)Source: BBVA Research

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2012 2013 2014 2015


6 May 2014

Across the eurozone countries: a widespread mild recovery

Germany continues to lead the eurozone. Unchanged outlook, though some measures agreed by the new government depart from recent stance.

Germany continues to lead the eurozone. Unchanged outlook, though some measures agreed by the new government depart from recent stance.

France: Still lacking a firm recovery. France: Still lacking a firm recovery.

Italy: The economy is recovering, with more political stability and some promising reform initiatives that need to be implemented

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2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

EMU Germany France Italy

Eurozone countries: GDP growth (YoY)Source: BBVA Research


6 May 2014

Spain: GDP growth (YoY)Source: BBVA Research

Strong export growth as export prices offsets euro appreciation while domestic demand picks up in a context of fiscal adjustment

Spain: gradual recovery after a long recession

Investment in M&E grows faster than average EMU and improves medium-term GDP growth outlook

Risks ahead: both external (Euro appreciation, deflation) and domestic (Reform fatigue, the Catalonia issue)

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2012 2013 2014 2015


6 May 2014

Eurozone: stronger domestic demand for 1Q14

Confidence indicators were consistent with economic activity in the eurozone gaining traction,

still led by Germany but also with a better outlook in the periphery

Confidence indicators were consistent with economic activity in the eurozone gaining traction,

still led by Germany but also with a better outlook in the periphery

Our MICA-BBVA model projects quarterly GDP growth of around 0.4% q/q in 1Q14.

Our MICA-BBVA model projects quarterly GDP growth of around 0.4% q/q in 1Q14.

EZ: real GDP growth and forecasts based on MICA-BBVA model (%, QoQ)Source: BBVA ResearchCurrent forecast: 4th December

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Series9 Series3 Series4 MICA-BBVA GDP observedCI 20% CI 40% CI 60%


6 May 2014

Positive external environment, but with doubts onthe impact from both China and exchange rate

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GDP Exports

2014 2015

Impact of strong euro on GDP and exports* (pp)Source: BBVA Research

* Estimated impact of new projection for the EURUSD (average 2014 = 1.35) vs previous projection, i.e EURUSD +4% higher than previously

expected in 2014

Impact of strong euro on inflation* (pp)Source: BBVA Research

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2014 2015


6 May 2014

Financial markets






Contents


6 May 2014

Inflation in the eurozone: baseline scenarioSource: BBVA Research

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20% 40% 60% 95%

Inflation: slow increase in the forecast horizon and narrow risk of deflation in our baseline scenario

The decline in headline inflation over 1Q14 accumulated in the more volatile components; core inflation remained stable

Downward pressures stem from the euro’s appreciation and low raw material prices

The current recovery in demand, the muted financial stress and the repaired banking lending channel reduce deflation risks


6 May 2014

Measuring trend inflation through alternativemeasuresEurozone: inflation (% YoY)Source: BBVA Research

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CI95 CI80 CI60

CI40 CI20 Optimal trim

Headline (official) Core (official)

1. We compute 2,601 symmetric and asymmetric trimmed means for the EZ using

the weighted distribution of the CPI subclasses (95 for EZ)

1. We compute 2,601 symmetric and asymmetric trimmed means for the EZ using

the weighted distribution of the CPI subclasses (95 for EZ)

3. Finally, we constructed CI around the optimum trimmed-mean selected using the

predictive capacity test proposed by Diebold and Mariano (1995)

3. Finally, we constructed CI around the optimum trimmed-mean selected using the

predictive capacity test proposed by Diebold and Mariano (1995)

2. We then selected the “optimum” trimmed-mean based on its predictive capacity with respect to annualized mean inflation over a

forecast horizon of 30 months

2. We then selected the “optimum” trimmed-mean based on its predictive capacity with respect to annualized mean inflation over a

forecast horizon of 30 months

Measuring trend inflation through trimmed-means, methodology

Trend inflation in the EZ is trending downwards and currently is well below the

target, at 1%.


6 May 2014

Measuring trend inflation through alternativemeasuresEurozone: inflation (% YoY)Source: BBVA Research

1. The model is able to discriminate transitory from permanent deflationary episodes

1. The model is able to discriminate transitory from permanent deflationary episodes

3. In the EZ the main caveat is the limited sample, which implies to take some

assumptions: with and without variance change in inflation

3. In the EZ the main caveat is the limited sample, which implies to take some

assumptions: with and without variance change in inflation

2. Inflationary pressures are embedded in the performance of some macro variables (GDP,

investment ratio, unemployment rate and inflation)

2. Inflationary pressures are embedded in the performance of some macro variables (GDP,

investment ratio, unemployment rate and inflation)

Measuring trend inflation as a latent variable, methodology

Trend inflation in the EZ is trending downwards (more rapidly if a break of inflation volatility is

considered) and currently is well below the target, at 1.5% (or 1%).

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1997

1999

2001

2003

2005

2007

2009

2011

2013

Headline Core

Trend Trend with break in volatility

*For more details see Annex 1 and http://www.bbvaresearch.com/KETD/fbin/mult/1405_Global_Economic_Outlook_tcm348-448754.pdf?ts=1252014


6 May 2014

Deflation probability is quite low in the EZ, but less so in the periphery

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3 consecutive months




Eurozone: proxy for deflation risk(% CPI items with persistently negative MoM swda growth rates)Source: BBVA Research based on INE

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3 consecutive months 6 consecutive months

9 consecutive months 12 consecutive months

Spain: proxy for deflation risk(% CPI items with persistently negative MoM swda growth rates)Source: BBVA Research based on INE


6 May 2014

EZ: even though one should not read too much from these numbers, long-term inflation expectations are not low

2Y Inflation swap (spot rates %) Source: Bloomberg, ECB and BBVA Research

• Short-term inflation expectations: quite sensitive to negative surprises in inflation. • Long-term inflation expectations: more stable and above the target, but still trending downwards

Eurozone inflation expectations implicit in bond markets (%)*Source: Bloomberg and BBVA Research

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Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14

EU FR Ger SPF 2Y ahead SPF (2015)

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5Y5Y inflation Swap

2Y2Y inflation Swap*GDP-weighted average of separately estimate breakeven rates for France and

Germany


6 May 2014

Inflation surprises affect short-term inflation expectations

Impact on inflation expectations* Change in five-day rolling average (daily data, bps)Source: Bloomberg and BBVA Research

A simple case study indicates that, on average, market-based inflation expectations react to surprises in inflation, a pattern that is more evident since 2013.

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1Y infl.Swap

2Y infl.Swap

3Y infl.Swap

1Y1Y fwdinfl. Swap

2Y2Y fwd.infl. Swap

5Y5Y fwd.infl. Swap

5Y5Y fwd.Breakeven

Impact on Flash HCPIChange in five-day rolling average (daily data, bps)Source: Bloomberg and BBVA Research

* Simple average of German and French inflation expecations. From Jan 2013 up to now.

** Significance largely driven by a small number of large surprises in inflation

Downside

surprises on

Inflation

Upside

surprises on

Inflation

Inflation surpises

Statistical

significance**

1Y infl. Swap -7,2 -0,1 YES

2Y infl. Swap -5,2 3,3 YES

3Y infl. Swap -4,1 2,4 YES

1Y1Y fwd infl. Swap -3,2 6,2 NO

2Y2Y fwd. infl. Swap 2,8 3,1 NO

5Y5Y fwd. infl. Swap -0,1 -0,8 NO

5Y5Y fwd. Breakeven 2,8 3,0 NO


6 May 2014

Financial markets



Fragmentation and its impact on monetary policy: a comment

on forward guidance



Contents


6 May 2014

Fragmentation remains above pre-crisis levels. A fresh impulse is needed.

Composite measure of eurozone financial fragmentation*Source: BBVA Research and Bloomberg

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*For more details see Annex and http://www.bbvaresearch.com/


6 May 2014

Fragmentation: implications for monetary policy.

Conventional policy is less effectiveas the monetary-policy transmission is curtailed.

Conventional policy is less effectiveas the monetary-policy transmission is curtailed.

Under “normal” conditions

It generates unwanted (asymmetric) risksIt generates unwanted (asymmetric) risks

Forward guidance (FG) seen as an “optimal commitment device”

as there is no room left for conventional policy

Does fragmentation affect FG?

Forward guidance (FG) seen as an “optimal commitment device”

as there is no room left for conventional policy

Does fragmentation affect FG?

Under the zero-lower-bound restriction

Under the zero-lower-bound restriction

ECB. FXCP, My 2014

Fragmentation calls for the strengthening of FG

Interest rates under different policy rulesSource: BBVA Research

*Fragmentation is modeled by a lower interest rate elasticity in the IS curve

Under models of optimal policy under commitment, fragmentation imposes the need for lower rates for a longer time: forward guidance should be reinforced.

Under models of optimal policy under commitment, fragmentation imposes the need for lower rates for a longer time: forward guidance should be reinforced.

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Output Inflation

Optimal rule, commitment Taylor rule

Output gains/losses and inflation in the medium term*Source: BBVA Research

*Cumulative output gains/losses relative to equilibrium.

For more details see Annex and http://www.bbvaresearch.com/KETD/fbin/mult/140506_Europe_Economic_Watch_tcm348-448578.pdf?ts=1252014

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timetimetimetime

Optimal Taylor

Commitment

Commitment with fragmentation


6 May 2014

Financial markets






Contents


6 May 2014

QE: main channels by which QE may alter real rates

Signalling channel Signalling channel Signalling channel Signalling channel

Targeting channelTargeting channelTargeting channelTargeting channel

Liquidity channelLiquidity channelLiquidity channelLiquidity channel

Credit channelCredit channelCredit channelCredit channel

Inflation channelInflation channelInflation channelInflation channel

Conclusions from recent Conclusions from recent Conclusions from recent Conclusions from recent

experiencesexperiencesexperiencesexperiences

QE announcements “postpone” date of first

rate hike by around 4 to 6 months.

In In In In QE1QE1QE1QE1, it explained between 50% and , it explained between 50% and , it explained between 50% and , it explained between 50% and

70% 70% 70% 70% of the reduction in 10Y Treasury reduction in 10Y Treasury reduction in 10Y Treasury reduction in 10Y Treasury

yieldsyieldsyieldsyields.

The only channel to raise rates (liquidity

premium).

Large impact on riskier bondsLarge impact on riskier bondsLarge impact on riskier bondsLarge impact on riskier bonds, with a

multiplier effect through the strengthening

of the financial sector´s balance sheets.

QEs´ efficacy on this front remains a topic

of heated debate.

Main caveats Main caveats Main caveats Main caveats

in the EZin the EZin the EZin the EZ

• Can it help reduce Can it help reduce Can it help reduce Can it help reduce

fragmentation?fragmentation?fragmentation?fragmentation?

• HowHowHowHow relevantrelevantrelevantrelevant isisisis

moral moral moral moral hazardhazardhazardhazard????

• Enough support?


6 May 2014

QE: heterogeneous impact on yields (from steadystate).

assets

channels

12

Month

interest rate

2Y

bond yield

Core

2Y

bond yield

Periph.

10Y

bond yield

Core

10Y

bond yield

Periph.

Corp.

BBB

Corp.

AAA

Signaling 0 - - - - 0 0 - -

Targeting 0 0 0 - - - - - - - 0 - - - -

Liquidity +/0 + + 0 + + 0 0 +

Credit 0 0 - 0 - - - - - - - 0

Inflation 0 - - 0 0 -/0 -/0

RANKING

1: higher impact

6. Lower impact

6 5 3 4 1 2 3

Potential impact QE on (European) assets through diffierent channelsSource: BBVA Research


6 May 2014

QE simulation: impact would depend on size and composition of purchases.

Furhter impact on yields would alsodepend on how much of a surprise is

the ECB announcement.

Furhter impact on yields would alsodepend on how much of a surprise is

the ECB announcement.

Impact would be significant onperipheral bonds (reduction of around -

60/200 bps), less so on the Bund.

Impact would be significant onperipheral bonds (reduction of around -

60/200 bps), less so on the Bund.

For any particular bond, the targetingchannel grows in importance the more is purchased by the ECB (relative to its

total amount outstanding).

For any particular bond, the targetingchannel grows in importance the more is purchased by the ECB (relative to its

total amount outstanding).

Amount of 10Y sovereing bonds widheld by official entities.(% of total outstanding)

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Current amount owned by official entities (incl. foreign)

QE purchases of EUR 1 trillion according to capital keys

• We estimate the impact on sovereign yields through a panel assuming that a one-trillion QE would only be used for buying government bonds according to ECB’s capital key*.

* For more details see Annex and http://www.bbvaresearch.com/


6 May 2014

QE simulation: CB balance sheets have been an important driver of FX

Relative monetary policy stance1 vs EUR-USD1 Relation between Fed and ECB central bank assets, ratio Fed/ECBSource: Bloomberg and BBVA Research

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Relative monetary policy stance EUR-USD (rhs)

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-07

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BCE FED

• With short rates approaching the ZLB, central banks began to pursue less conventional monetary policies—

including (QE)—to stimulate economic growth. This has led in to significant increase in their balance sheets

which has have been an important driver (a significant variable in FX models) of currencies over recent years.

• If the ECB embarks in a QE of 1 trillion (one year time program and at the same time the Fed continues with

the tapering) this would depreciate the euro by around 8%

Fed and ECB balance sheetIndex Jan 2007=100Source: Bloomberg and BBVA Research

* See Annex 3 for more details


6 May 2014

Financial markets






Contents


6 May 2014

Output gap (% of Potential GDP)Source: BBVA Research

Challenges ahead: the eurozone cycle lags behind the US cycle

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USA EMU


6 May 2014

Challenges ahead: the Fed will eventually tighten

4Q14

Expected

End QE3

3Q15

First FFR Hike

1H16

Policy NormalizationBalance sheet: let securities

mature/sales

Expected Timeline for Fed Exit Strategy

The probability of

early rate hike has

recently increased

12-month ahead fed funds and 10-year Treasury yieldsSource: Bloomberg and BBVA Research

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10YT (lhs) 12-month ahead fed funds


6 May 2014

10Y bond yield: US and GER, % Source: Bloomberg and BBVA Research

1y1y forward OIS in the EUR and USD marketsSource Bloomberg and BBVA Research

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Spread US-Germany (rhs) Germany 10Y yield US 10Y yield

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EUR 1y1y fwd OIS USD 1y1y fwd OIS

ECB FG

Rate cut

Jan ECB meeting

Mar. ECB

meeting

Mar. FOMCmeeting

Challenges ahead: will the EUR-rate decoupling persist?


6 May 2014

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EURUSD (lhs) Rate differential (rhs)

2-year interest rate differential* vs EURUSD* German Bunds – US Treasuries, %Source: Bloomberg, EPFR and BBVA Research

Challenges ahead: will the Fed´s exit be enough to curb the euro strength?

Recent market developments.

Jorge Sicilia, Chief Economist BBVA


Frankfurt, 6 May 2014


6 May 2014

Annex 1: Measuring trend inflation as a latent variable

Results for Europe. No volatility breaks

Due to the limited sample, we estimate a model with none volatility breaks.

DLM - Estimation by BFGS

Convergence in 27 Iterations. Final criterion was 0.0000000 <= 0.0000100

Quarterly Data From 1995:01 To 2013:04

Usable Observations 76

Rank of Observables 297

Log Likelihood 1317.4923

Concentrated Variance 5.5057e-004

Variable Coeff Std Error T-Stat Signif

************************************************************************************

1. PHI_U 0.656675840 0.085056567 7.72046 0.00000000

2. BETA_X -0.679675941 0.165404375 -4.10918 0.00003971

3. MU_PI1 0.631668389 0.065884436 9.58752 0.00000000

4. PHI_0 -0.210063876 0.040683286 -5.16340 0.00000024

5. BETA_Y1 1.231126294 0.216626628 5.68317 0.00000001

6. BETA_Y0 -0.069303323 0.236909599 -0.29253 0.76988091

7. ETA_Y 0.238879843 0.062039824 3.85043 0.00011791

8. THETA_1 0.948325331 0.021130490 44.87948 0.00000000

9. THETA_2 0.385501619 0.021588704 17.85664 0.00000000

10. GAMMA_Y 0.003615491 0.000434267 8.32550 0.00000000

11. SIG_NU_U 0.000181595 0.000268670 0.67590 0.49910235

12. SIG_NU_X -0.010172746 0.004327531 -2.35070 0.01873792

13. SIG_OMEGA_GAMMA 0.025620424 0.010378429 2.46862 0.01356342

14. SIG_OMEGA_U 0.012883349 0.006042958 2.13196 0.03301008

15. SIG_OMEGA_X 0.014680209 0.005236606 2.80338 0.00505696

16. SIG_NU_PI2 0.009308235 0.005397659 1.72449 0.08461852


6 May 2014

We try to test and estimate a volatility break in inflation after the financial crisis.

DLM - Estimation by BFGS

Convergence in 2 Iterations. Final criterion was 0.0000000 <= 0.0000100

Quarterly Data From 1995:01 To 2013:04

Usable Observations 76

Rank of Observables 297

Log Likelihood 1309.6869

Concentrated Variance 1.3170e-003

Variable Coeff Std Error T-Stat Signif

************************************************************************************

1. PHI_U 0.626811352 0.036309212 17.26315 0.00000000

2. BETA_X -0.220359969 0.073325199 -3.00524 0.00265370

3. MU_PI1 0.548779791 0.067969085 8.07396 0.00000000

4. PHI_0 -0.194138919 0.024525125 -7.91592 0.00000000

5. BETA_Y1 0.615486351 0.081020050 7.59672 0.00000000

6. BETA_Y0 0.166421302 0.082005132 2.02940 0.04241746

7. ETA_Y 0.203964105 0.046800230 4.35819 0.00001311

8. THETA_1 0.963710169 0.022925514 42.03658 0.00000000

9. THETA_2 0.343998809 0.029412153 11.69580 0.00000000

10. GAMMA_Y 0.003511292 0.000358076 9.80600 0.00000000

11. SIG_NU_U1 0.000075424 0.000036338 2.07564 0.03792728

12. SIG_NU_X1 0.000061393 0.000508807 0.12066 0.90396038

13. SIG_NU_U2 0.000055382 0.000094203 0.58790 0.55660205

14. SIG_NU_X2 0.001188461 0.001680238 0.70732 0.47936959

15. SIG_OMEGA_GAMMA 0.006901673 0.001657759 4.16326 0.00003137

16. SIG_OMEGA_U 0.003930774 0.000980551 4.00874 0.00006104

17. SIG_OMEGA_X 0.003772815 0.000873977 4.31683 0.00001583

Annex 1:Measuring trend inflation as a latent variable

Results for Europe. Volatility breaks in inflation

With volatility break in inflation, the model modifies the signal/noise ratio

ECB. FXCP, My 2014

• In order to monitor the financial fragmentation in the euro area, we constructed a composite measure of

euro area financial fragmentation. The advantage of utilizing such index is the ability to monitor, on a

monthly basis, more accurately the evolution of financial fragmentation.

• The FFI is constructed using principal component analysis, a statistical method of extracting factors

responsible for the co-movement of several variables. We assume that financial fragmentation is the

primary factor influencing this co-movement, and by extracting this factor (the first principal component)

we are able to create an index.

• The components are:

o the interquartile range of euro area countries* two-year government bond yields ,

o the cross-country dispersion (specifically, the coefficient of variation: the ratio of the standard

deviation to the mean) of bank lending rates to corporates and households (average),

o the gross liquidity provision by the Eurosystem as a share of bank assets, and

o the Target 2 balances surplus.

• To combine these varied indicators**, we calculate a Z-score for each, and then estimate the first

principal component of these Z-scores.

* Ireland, Spain, Germany, Italy, France, Netherlands, Portugal, Greece, Belgium, Finland and Austria.

** Data: monthly frequency. Sources: National Central Banks, ECB and Bloomberg

Annex 2: Fragmentation

Financial fragmentation index, BBVA Research

ECB. FXCP, My 2014

*Clarida, R., J. Gali and M. Gertler: The Science of Monetary Policy: A New Keynesian Perpective.

Additional literature:

• Campbell, J., C. Evans, J. Fisher and A. Justiniano: Macroeconomic Effects of Federal Reserve Forward Guidance.

• English W., J. Lopez-Salido and R. Tetlow: The Federal Reserve's Framework for Monetary Policy--Recent Changes and New Questions.

• Woodford, M.: Methods of Policy Accommodation at the Interest-Rate Lower Bound.

Annex 3: On forward guidance

A simple model (Clarida, Gali, Gertler*)

ECB. FXCP, My 2014

*Serkan Arslanalp and Tigran Poghosyan: Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies

The paper employs a panel data methods to analyze the relationship between the foreign investor base of sovereign debt, and

long-term sovereign bond yields in advanced economies (Aes*). The model uses a quarterly investor base dataset for 22 Aes over

Q12004‒Q32013. The specification includes the standard macroeconomic determinants of long-term sovereign bond yields (short-

term bond yields, GDP growth, CPI inflation, Debt-to-GDP ratio.).The paper also control for the domestic central bank purchases of

government debt. In addition, they introduce the foreign investor base variable (breakdown in share of official foreign debt and the

share of private foreign debt) as an additional determinant of long-term sovereign bond yields. Estimations are performed using the

fixed effects estimator.

* Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea, the Netherlands, New Zealand,

Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Annex 4: QE simulation

QE simulation on peripheral bonds (Arslanalp and Poghosyan*)

Recent market developments by Jorge Sicilia, Chief Economist BBVA Group (May 2014)

Economy & Finance

Transcript of Recent market developments by Jorge Sicilia, Chief Economist BBVA Group (May 2014)