Bond Yields in Emerging Economies: It Matters What State You Are In

Abstract

While many studies have looked into the determinants of yields on externally issued sovereign bonds of emerging economies, analysis of domestically issued bonds has hitherto been limited, despite their growing relevance. This paper finds that the extent to which fiscal variables affect domestic bond yields in emerging economies depends on the level of global risk aversion. During tranquil times in global markets, fiscal variables do not seem to be a significant determinant of domestic bond yields in emerging economies. However, when market participants are on edge, they pay greater attention to countryspecific fiscal fundamentals, revealing greater alertness about default risk. JEL Classification Numbers:E44, E62, G15, H63, O16.

Global Spillovers into Domestic Bond Markets in Emerging Market Economies

“…For domestic bond yields, Baldacci and Kumar (2010) find that in periods of financial distress-defined as periods of high levels of the VIX index, high inflationary pressures, and more adverse global liquidity conditions-fiscal deterioration has a larger impact on bond yields. Jaramillo and Weber (2013) show that, when global risk appetite is low, domestic bond yields are mostly influenced by inflation and real GDP growth expectations, suggesting that, in tranquil times, markets focus more prominently on risk stemming from sensitivity to macroeconomic shocks. However, when global risk appetite is high, creditors' concern with default risk takes center stage and expectations regarding fiscal deficits and government debt play a significant role in determining domestic bond yields.…”

“…This paper addresses this question by identifying the global factors that are most likely to impact on domestic bond markets of emerging market economies, extending the work in Jaramillo and Weber (2013). It also explores the possibility that the vulnerability to global movements is not uniform but rather depends on country specific characteristics.…”

Fear or fundamentals? Heterogeneous beliefs in the European sovereign CDS market

“…For instance, Arghyroua and Kontonikas (2012), Beirne and Fratzscher (2013) and Ghosh et al (2013) all find that before the crisis, spreads were too low, and the market pricing of sovereign risk was not fully reflecting fundamentals but rather international risks. However, recent works have also documented that the crisis led to a renewed interest in country-specific economic fundamentals for European economies (Jaramillo and Weber, 2013;Mody, 2009). While various non-fundamental based explanations have been provided, there remains a gap in the current understanding on the exact cause of the recent debt market turmoils in Europe.…”

Exploring the Role of Foreign Investors in Russia's Local Currency Government Bond (OFZ) Market

“…After the 2008-09 global financial crisis (GFC), driven by systemic economies' accommodative monetary policies and emerging markets' (EMs) stronger growth perspective and enhanced structural frameworks, a global search for yield has led to large capital inflows to LCY government bond markets in EMs (IMF, 2012, Ahmed and Zlate, 2013, Arslanalp and Tsuda, 2012, and Sahay and others, 2014. Increased foreign interest has contributed to lower bond yields (Comelli, 2012;Csonto and Ivaschenko, 2013;and Jaramillo and Weber, 2012) but sometimes higher volatility (Ebeke and Lu, 2015).…”