Effects of US macroeconomic news on emerging market sovereign yields

This paper studies the transmission of U.S. macroeconomic surprises on components of emerging market (EM) sovereign yields. By decomposing yields into expected short-term interest rates, term premia, and credit risk premia, and using high frequency data, I identify a distinct “fiscal channel”: Favorable surprises in initial jobless claims lead to a statistically significant decline in credit risk premia in emerging markets, particularly at longer maturities, which offset pressures from rising term premia. Conversely, EM yields remain relatively muted in response to U.S. core CPI surprises. These findings suggest: 1) the importance to examine credit risk in term structures of emerging markets to understand U.S. spillover effects, and 2) that investors’ risk perceptions respond differently to distinct types of U.S. economic news, even when the underlying surprises are nominally positive.