Sovereign Bond Market Risks and Their Relation to Fiscal Fundamentals

Abstract

This article examines how fiscal fundamentals shape sovereign bond market risks in recent years and how this relationship evolves under episodes of heightened uncertainty. Using a systematic literature review of peer reviewed articles published between 2019 and 2023, it synthesizes evidence on the links between public debt, deficits, fiscal space and institutional quality, on the one hand, and bond yields, spreads and sovereign credit risk, on the other. The review describes how the selected studies operationalize sovereign risk and fiscal variables, compares their empirical approaches across advanced and emerging economies, and organizes the findings into themes covering normal times, crisis and pandemic episodes, and the role of monetary policy and financial integration. The main findings show that fiscal fundamentals remain central to sovereign risk pricing, but their impact is state dependent and mediated by fiscal space, credibility and global conditions, with important implications for fiscal frameworks and financial stability.