German Government Bond Yields During the COVID-19 Pandemic: Some Thoughts About Monetary Policy and the Term Premium

During the COVID-19 pandemic, German short-term government bond yields seem to Granger cause long-term government bond yields. Moreover, by examining 2- and ­30-year interest rates, feedback effects between the two time series can be detected. This is not the case when analyzing 2- and 10-year bond yields. As is widely known, long-term interest rates are particularly important for the European life insurance industry. Given the period examined here, possible explanations of these empirical findings should certainly not focus on changes to the key interest rates because these remained unchanged during the years 2020 and 2021. The unconventional monetary policy measures implemented by the ECB and the existence of risk premia seem to be more promising starting points when trying to understand the results reported here.