Monetary Factors in Forming the Yields of Domestic Government Bonds

Abstract

Ensuring fiscal sustainability and effective public debt management has become particularly important amid global economic instability, rising inflationary risks, and uncertainty in financial markets. One of the key mechanisms shaping the cost of government debt instruments is the monetary policy of the central bank, expressed through the key policy rate. The role of the key policy rate as a determinant of the yields on domestic government bonds (OVDP) remains a subject of active scholarly debate and has significant practical implications for the country's fiscal and debt policy. This article reveals the impact of the key policy rate of the National Bank of Ukraine (NBU) on the weighted average annual yields of OVDP with different maturities (short-term, medium-term, and long-term), and formulates practical conclusions and recommendations for monetary and fiscal policy. A comprehensive approach was applied, including the generalization and description of the dynamics of the NBU key policy rate and the weighted average OVDP yields, correlation analysis to identify relationships between indicators, and the construction of a multifactor regression model. The study showed that the relationship between the key policy rate and the weighted average OVDP yields is strong and significant. The regression model demonstrated a high level of descriptive power regarding changes in OVDP yields (coefficient of determination R² > 0.98). Medium-term OVDP appeared to be the most sensitive to changes in the key policy rate, indicating a substantial transmission effect over the medium time horizon. Short-term and long-term yields exhibited divergent reactions driven by market expectations regarding future monetary policy and financing conditions. Empirical evidence confirmed that the reaction of the OVDP market varies depending on the maturity of the instruments, which should be taken into account when shaping the government's borrowing strategy. The conducted research confirmed that the NBU key policy rate is a fundamental factor shaping the structure and level of market interest rates on government debt securities. The obtained results are consistent with theoretical models of monetary transmission and complement the existing empirical evidence on the interaction between monetary and debt policy in Ukraine.