Emerging Market Local Currency Bonds: Diversification and Stability

35 Pages Posted: 5 Jan 2013 Last revised: 13 May 2014

See all articles by Ken Miyajima

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department; International Monetary Fund (IMF)

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department

Tracy Chan

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: November 1, 2012

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.

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

JEL Classification: E43, F36, G12

Suggested Citation

Miyajima, Ken and Mohanty, Madhusudan S. and Chan, Tracy, Emerging Market Local Currency Bonds: Diversification and Stability (November 1, 2012). BIS Working Paper No. 391, Available at SSRN: https://ssrn.com/abstract=2195957

Ken Miyajima (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Tracy Chan

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
207
Abstract Views
1,939
Rank
266,316
PlumX Metrics