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Emerging market local currency bonds: diversification and stability

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  • Ken Miyajima
  • Madhusudan Mohanty
  • Tracy Chan

Abstract

Over the past three years, cross-border inflows into emerging market (EM) local currency bonds have surged. The returns on these bonds have moved more closely with those on international assets regarded as "safe", particularly following the euro area debt crisis. This paper first demonstrates that domestic factors have tended to dictate the dynamics of the EM local currency government yield. The importance of local drivers has probably increased the potential diversification benefit, creating strong appetite for the asset class. Second, the paper confirms that EM local currency government yields have behaved more like safe haven yields since 2008: they have dropped, rather than increased, in response to worsening global risk sentiment. Yet EM local currency government yields could be susceptible to adverse external shocks: the yield dynamics have been affected by unsustainably low US Treasury yields. Moreover, the international role of EM local currency bonds depends crucially on the behaviour of exchange rates. Nevertheless, the further development of local currency bond markets should help strengthen the stability of the international monetary and financial system.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 391.

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Length: 35 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:bis:biswps:391

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Related research

Keywords: Currency mismatches; emerging market local currency bond; diversification benefit; safe asset; panel VAR;

References

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  2. Barry Eichengreen & Pipat Luengnaruemitchai, 2006. "Why doesn’t Asia have bigger bond markets?," BIS Papers chapters, in: Bank for International Settlements (ed.), Asian bond markets: issues and prospects, volume 30, pages 40-77 Bank for International Settlements.
  3. Caballero, Ricardo J. & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Scholarly Articles 3229094, Harvard University Department of Economics.
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  10. Qianying Chen & Andrew Filardo & Dong He & Feng Zhu, 2012. "International spillovers of central bank balance sheet policies," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 220-264 Bank for International Settlements.
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  13. Stijn Claessens & Daniela Klingebiel & Sergio L. Schmukler, 2007. "Government Bonds in Domestic and Foreign Currency: the Role of Institutional and Macroeconomic Factors," Review of International Economics, Wiley Blackwell, vol. 15(2), pages 370-413, 05.
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  16. M S Mohanty & Philip Turner, 2006. "Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?," BIS Quarterly Review, Bank for International Settlements, September.
  17. Aaron Mehrotra & Ken Miyajima & Agustin Villar, 2012. "Developments of domestic government bond markets in EMEs and their implications," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal policy, public debt and monetary policy in emerging market economies, volume 67, pages 31-50 Bank for International Settlements.
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Citations

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Cited by:
  1. Paul Mizen & Frank Packer & Eli Remolona & Serafeim Tsoukas, 2012. "Why do firms issue abroad? Lessons from onshore and offshore corporate bond finance in Asian emerging markets," Working Papers 2012_16, Business School - Economics, University of Glasgow.
  2. Lillie Lam & James Yetman, 2013. "Asia’s decoupling: fact, forecast or fiction?," BIS Working Papers 438, Bank for International Settlements.
  3. Stolbov, Mikhail, 2014. "The causal linkages between sovereign CDS prices for the BRICS and major European economies," Economics Discussion Papers 2014-9, Kiel Institute for the World Economy.
  4. Essers, Dennis & Cassimon, Danny, 2012. "Washing away original sin: vulnerability to crisis and the role of local currency bonds in Sub-Saharan Africa," IOB Working Papers 2012.12, Universiteit Antwerpen, Institute of Development Policy and Management (IOB).
  5. Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.
  6. Márcia Saraiva Leon, 2014. "International Capital Flows and Yields of Public Debt Bonds," Working Papers Series 345, Central Bank of Brazil, Research Department.
  7. Ken Miyajima, 2013. "Foreign exchange intervention and expectation in emerging economies," BIS Working Papers 414, Bank for International Settlements.
  8. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
  9. Laura Jaramillo & Anke Weber, 2013. "Global Spillovers into Domestic Bond Markets in Emerging Market Economies," IMF Working Papers 13/264, International Monetary Fund.

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