The COVID-19 Pandemic and Sovereign Bond Risk

•A mix of public health, fiscal, macroprudential, monetary, or market-based policies are used to tackle the COVID-19 pandemic.•Using an event study methodology we assess the impact of the pandemic in Europe on sovereign CDS spreads.•A higher number of cases and deaths and public health containment responses significantly increase the uncertainty among investors in European government bonds.•Other governmental policies magnify the effect in the short run as supply chains are disrupted. Governments around the world are tackling the COVID-19 pandemic with a mix of public health, fiscal, macroprudential, monetary, and/or market-based policies. We assess the impact of the pandemic in Europe on sovereign CDS spreads using an event study methodology. We find that a higher number of cases and deaths and public health containment responses significantly increase the uncertainty among investors in European government bonds. Other governmental policies magnify the effect in the short run as supply chains are disrupted. Moreover, an increased debt-to-GDP ratio significantly boosts the cumulative abnormal change of CDS spreads, which indicates that investors are concerned about countries that are too indebted and thus have a limited capacity to intervene and provide fiscal stimuli and emergency fiscal packages to businesses and households.