Sovereign Risk and Natural Disaster Shocks: Unraveling the Domestic Yield Curve Response

This paper investigates the impact of natural disasters on the domestic sovereign yield curve, shedding light on their distinct transmission channels. Using a sample of 72 developing countries during the period 2000-20, and leveraging a newly compiled dataset on domestic treasury bill and bond yields, the findings from the fixed-effects and the local projection difference in difference estimations point to a disaster premium in the pricing of domestic government securities. While natural disasters significantly steepen the yield curve, their effects are confined to short-term maturity debts. In constrast, a worsening in climate vulnerability shifts upward the entire yield curve. Heightened fiscal stress and monetary policy stance emerge as the main transmission channels. These results underscore the importance of integrating resilience building into debt management and fiscal policy frameworks.