I need to calculate a 30-year eurozone risk-free rate. The longest maturity of euro area govt benchmark bonds is 10 years, so I’ll go through the US 30-year risk-free rate, add the risk premium and the inflation differential between the two.
Now do you have an idea how to get the risk premium of the Eurozone over the US? I only got individual country risk premia but nothing for the Eurozone as a whole.
Or any other ideas how to get a 30-year risk-free rate in euros?
Interesting question, the lack of inflation and growth prospects seem to really be affecting rates over there. I’m shocked that there isn’t a bigger premium on long term debt in some of these countries. Germany’s 10 year is below 1%, not a good sign. If you’re grouping all European countries together, maybe there’s a 1% premium over US treasuries? Most of that would be the risk premium
Is there a way to use the individual country premiums to calculate a blended rate? maybe by GDP?
That seems like a pretty good measure to use. I hadn’t seen it before.
The EFSF bond has the advantage of being a true market price. i.e. it is an investible security backed by the collective Eurozone governments. The ECB blended rate must exclude some lower grade countries such as Spain and Italy as its yield is lower. So it really depends on what you are looking for. Arguably you could just use the German 30 year bund yield as the Eurozone risk-free rate.
I would argue that the German rate, or German plus the Scandinavian bloc’s rates, is the true Eurozone’s “risk-free” rate. using the German rate makes more sense considering the inflation prospects. i wouldn’t consider anything with apparent default spread (i.e. anything that spiked during the 2011 crisis) to represent the Eurozone “risk-free” rate. it’s not risk free if the rate spikes during a period of greater risk aversion.