South African Reserve Bank working paper links sovereign yield curve responses to extreme weather events to fiscal regimes

The South African Reserve Bank published a Working Paper assessing how extreme weather events affect the term structure of sovereign bond yields, finding that the yield response and its drivers vary materially across countries depending on fiscal strength. The analysis decomposes yields into expected short-rate paths and term premia, showing that fiscal regimes help explain differences in both yield and inflation dynamics after disasters. Using EM-DAT disaster data and local-projection methods on a global panel of 15 advanced economies and nine leading emerging market economies, the paper focuses on the largest 50% of events per country by human impact. In advanced economies, low-debt countries see a significant rise in expected short rates, consistent with investors anticipating tighter monetary policy in response to inflationary pressures, while high-debt countries primarily show higher term premia consistent with increased debt issuance being priced in. In emerging markets, fiscally constrained countries exhibit muted yield responses, whereas higher-rated peers show lower expected short rates alongside higher term premia, suggesting expectations of monetary easing and increased issuance. Indicative results for 10 African economies point to larger-magnitude yield responses with patterns broadly aligned to emerging markets, subject to tighter data constraints.