Abstract: The market capitalization of international bond markets is larger than that of international equity markets. Moreover, the extent of international bond market linkages is worthy of investigation, as it may carry important implications for the cost of financing fiscal deficit, monetary policymaking independence, modeling and forecasting long-term interest rates, and bond portfolio diversification. However, compared to a are large body of literature on international equity market linkages (see Bessler and Yang, 2003), only a few empirical works have measured bond systematic risk and investigated international bond market linkages (see Smith (2002) or Barr and Priestley (2004) among them) and they are mainly centered on emerging markets. Recently, some authors have focused their attention in the European context. In our opinion, this recent literature overestimates the impact of systemic risk in yield differential behavior in the EMU (see Dune, Moore and Portes (2002); Favero, Pagano and Von Thadden (2005); Geyer, Kossmeier and Pischer (2004) or Pagano and Von Thadden (2004), among others). Certainly, yield evolution depends on both world and local risk factors, i.e. systemic and idiosyncratic risk. However, when differentials between yields are taken, the impact of world or common risk factors should mostly cancel out. Therefore, the objective of this paper is to implement a similar methodology as in our previous papers (Gómez-Puig, 2006a and Gómez-Puig 2006b) with the aim to be able to carry out both a panel data and a country-specific analysis for EMU and non-EMU participating countries during the first seven years of Monetary Integration with the objective to analyze the relative importance of the two kinds of factors of risk in yield differentials in both groups of countries. As far as we know, this is the first empirical study that implements an analysis of the effects of Monetary Union on the relative importance of systemic and idiosyncratic risk in EU-15 governments’ bonds yield spreads for such a long period of time (seven years since the beginning of EMU). The results present clear evidence that it is domestic (credit risk and market liquidity) rather than international risk factors (US interest rates evolution) that mostly drive the evolution of 10-year yield spread differentials over Germany in all EMU countries during the aforementioned period. Therefore, even though bond returns present a high co-movement (systemic risk accounts for a large proportion of their behavior), a very substantial part of this movement cancels out if we study yield spreads, which mostly reflect idiosyncratic, i.e. specific factors in each different country. In the case of non-EMU countries, where 10-year government yields do not display such high co-movement, adjusted yield spreads (corrected from the foreign exchange factor) are influenced more by world risk factors. The fact that these countries do not share a common Monetary Policy might explain these results.