Euro area sovereign bond risk premia before and during the Covid-19 pandemic.

We provide a novel modeling framework to decompose euro area sovereign bond yields into five distinct components: ( ) expected future short-term risk-free rates and a term premium, ( ) a default risk premium, ( ) redenomination risk premium, ( ) liquidity risk premium, and ( ) segmentation (convenience) premium. Identification is achieved by considering sovereign yields jointly with other rates, including sovereign credit default swap spreads with and without redenomination as a credit event trigger. We illustrate our model by studying yield components embedded in German, French, Italian, and Spanish sovereign bonds, before and after the onset of the Covid-19 pandemic in 2020, and by examining the impact of European Central Bank (ECB) monetary policy and European Union (EU) fiscal policy announcements in response to the pandemic.