Did this sizeable gap reflect different perceptions of the credit risk of these two AAA-rated sovereign issuers or did it reflect the effects of differences in market liquidity conditions? An answer is provided in the ECB Financial Integration Report by examining the difference in agency bond yield spreads in these two countries.
Debt securities issued by the French CADES and the German KfW would be expected to have the same risk characteristics as French and German government debt, respectively, since the debt securities issued by these two agencies are fully guaranteed by the respective governments. It turns out that, in contrast to the government bond yield spreads, agency yield spreads remained remarkably stable.