The Long-Run Impact of Sovereign Yields on Corporate Yields in Emerging Markets

IMF Working Papers, June 4, 2021

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The average pass-through of emerging-market sovereign bond yields to corporate bond yields is around one.
The pass-through is larger in countries with greater sovereign risks and where sovereign bonds are more liquid.
The pass-through is greater for corporate bonds with lower ratings, shorter maturities, and for those issued by financial companies and government-related firms.
Results support theoretical arguments that corporate and sovereign yields are linked together through credit risks and liquidity premiums.
Consequently, high sovereign risks may slowdown growth by persistently increasing private sector borrowing costs.

Greater sovereign risks → larger pass-through.
More liquid sovereign bonds → larger pass-through.
Corporate bond characteristics associated with larger pass-through:
- Lower ratings.
- Shorter maturities.
- Issuers that are financial companies.
- Issuers that are government-related firms.

Persistent elevation of sovereign yields can raise private sector borrowing costs over the long run.
Elevated private borrowing costs may slowdown growth through sustained higher corporate financing costs.
Policies that reduce sovereign risk and improve sovereign bond market liquidity could mitigate transmission to corporate yields.

By Delong Li, Nicolas E Magud, Alejandro M. Werner, Samantha Witte (June 4, 2021).

Source: "The Long-Run Impact of Sovereign Yields on Corporate Yields in Emerging Markets", IMF Working Paper No. 2021/155 (June 4, 2021).