Geopolitical risk and Taiwan’s government bond yields: Evidence from Nancy Pelosi’s visit

Abstract

We investigate how geopolitical risk in the Taiwan region affects its government bond yields using a structural approach. Specifically, we examine bond yield performance during the escalation of US-China tensions following Nancy Pelosi’s visit to Taiwan in August 2022. The results show that Pelosi’s visit triggered a persistent increase in Taiwan’s bond yields and expected yields, with an initial decline in short-term risk premia, which became significantly positive after 11 months. These results imply that, as geopolitical risk intensifies, the market anticipates a rise in the cost of public debt amid declining market confidence in Taiwan’s benchmark assets.