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Emerging Market Spread Compression: Is it Real or is it Liquidity?

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  • Ms. Laura E. Kodres
  • Kristian Hartelius
  • Kenichiro Kashiwase

Abstract

Despite recent turmoil, spreads on emerging market countries' sovereign bonds have fallen dramatically since mid-2002. Some have attributed the fall to improved economic fundamentals while others to ample global liquidity. The paper models spreads and attempts to empirically distinguish between the two factors. The results indicate that fundamentals, as embedded in credit ratings, are very important, but that expectations of future U.S. interest rates and volatility in those expectations are also a key determinant of emerging market spreads.

Suggested Citation

  • Ms. Laura E. Kodres & Kristian Hartelius & Kenichiro Kashiwase, 2008. "Emerging Market Spread Compression: Is it Real or is it Liquidity?," IMF Working Papers 2008/010, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/010
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    References listed on IDEAS

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