The impact of fiscal policy on government bond spreads in emerging markets

Spreads on government bonds are a collective expression of differences in the level of development, risk, expected returns and other essential characteristics of states or regions the bond yields of which we wish to compare. At issue here is a collective expression of factors that work on the bond supply and demand side. These are for example the political environment (or political risks), expected return, economic risks, expected inflation, expected change in the exchange rate, solvency, way in which the bonds of a given state fit into the portfolios of the major investors and so on. The paper identifies the influence of fiscal and non-fiscal factors on movements in spreads on government bonds in emerging markets. The possibility of isolating fiscal from non-fiscal influences on spreads and the identification of the nature of fiscal impacts can be of great importance for the conduct of fiscal policy. The results obtained can be used for an optimisation of fiscal policy so as to avoid negative impacts on yields (i.e. a growth in yields), that is, a growth in the costs of government borrowing. This paper enlarges the line of research by querying whether the structure of deficit financing (domestic or foreign) has an impact on bond yields in emerging markets, and how this impact is reflected on the other determinants of fiscal policy.