Description

This paper implements a state-space model to decompose sovereign yield spreads into latent credit and liquidity components, following the framework of Herrero and Mencía (2015). The model is applied to a set of developed countries—including Germany and the United States—during the 2018–2025 period. Results show a structural contrast between both markets. Germany exhibits a “safe haven” effect, where a negative liquidity premium offsets credit risk during stress. In contrast, U.S. liquidity moves from negative to positive, acting as a marginal cost in calm periods and as a shock absorber in crises.The model proves to be a valuable risk management tool, offering more granular monitoring than conventional indicators and helping to identify early credit risk signals masked by liquidity dynamics. Despite data constraints in some countries, the study provides a strong foundation for future research, including applications to emerging markets and stress episodes such as the COVID-19 pandemic.