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The Effects of U.S. Monetary Policy on Emerging Market Economies' Sovereign and Corporate Bond Markets

Author

Listed:
  • John D. Burger
  • Francis E. Warnock
  • Veronica Cacdac Warnock

Abstract

We analyze the effect of the US Federal Reserve’s monetary policy on EME sovereign and corporate bond markets by focusing on two dimensions: the evolution of the structure (size and currency composition) of the bond markets and their allocations within the bond portfolios of US investors. Global factors, particularly the level of long-term US Treasury yields, matter. Across all specifications, when US long-term interest rates were low (i) EMEs issued more sovereign and private-sector local currency bonds and more private-sector foreign currency bonds and (ii) US investment in EME sovereign bonds (both local currency and USD-denominated) increased. In contrast, after controlling for the level of US long-term interest rates, measures that attempt to isolate the effects of US unconventional monetary policy are often statistically insignificant in our analysis. Local factors matter too: The local currency government bond markets in countries with stronger regulatory quality/creditor rights are larger and attract relatively more US investment. Finally, consistent with Burger et al. (2017), we find that the well-known home bias phenomenon is at least in part a home currency bias: US investors exhibit no home bias against some countries’ USD-denominated bonds, whereas for local currency bonds the familiar home bias is very present.

Suggested Citation

  • John D. Burger & Francis E. Warnock & Veronica Cacdac Warnock, 2017. "The Effects of U.S. Monetary Policy on Emerging Market Economies' Sovereign and Corporate Bond Markets," NBER Working Papers 23628, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23628
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    References listed on IDEAS

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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