{
  "title": "Drivers of Emerging Market Bond Flows and Prices",
  "publication": "Global Financial Stability Notes, December 16, 2021",
  "sourceUrl": "https://www.imf.org/en/publications/global-financial-stability-notes/issues/2021/12/16/drivers-of-emerging-market-bond-flows-and-prices-511057",
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  "summary": "An interesting disconnect has taken shape between local currency- and hard currency-denominated bonds in emerging markets with respect to their portfolio flows and prices since the start of the recovery from the COVID-19 pandemic.",
  "sections": [
    {
      "heading": "Key findings",
      "content": "- A disconnect has developed between local currency- and hard currency-denominated bonds in emerging markets since the start of the recovery from the COVID-19 pandemic.\n- Emerging market assets recovered sharply from the COVID-19 sell-off in 2020, but the post-pandemic recovery in 2021 has been highly uneven.\n- Yields of local currency-denominated bonds have risen faster and are approaching their pandemic highs.\n- Hard currency bond yields are still near their post-pandemic lows.\n- Portfolio flows to local currency debt have lagged flows to hard currency bonds.\n- The disconnect is closely linked to the external environment and fiscal and inflationary pressures.\n- Local currency assets are significantly more sensitive to domestic fundamentals.\n- Hard currency assets are dependent on external risk sentiment to a greater extent.\n- Post-pandemic, stressed domestic fundamentals have weighed on local currency bonds, partially offsetting the boost from supportive global risk sentiment.\n- The analysis highlights risks from an asynchronous recovery and weak domestic fundamentals for emerging markets."
    },
    {
      "heading": "Methodology and modeling insights",
      "content": "- The note draws from the methodology developed in earlier Global Financial Stability Reports on:\n  - fundamentals-based asset valuation models for funding costs; and\n  - forecasting models for capital flows using the at-risk framework.\n- Results are consistent across models, supporting the differentiation in drivers for local versus hard currency assets."
    },
    {
      "heading": "Implications for policymakers and investors",
      "content": "- Evolution of the disconnect between local and hard currency markets remains a key consideration because local markets are the main source of funding for emerging markets.\n- Policymakers should monitor domestic fundamentals (including fiscal and inflationary pressures) given their larger influence on local currency assets.\n- Investors should account for greater sensitivity of hard currency assets to external risk sentiment when allocating across emerging market bond types."
    },
    {
      "heading": "Risks and considerations",
      "content": "- An asynchronous global recovery can exacerbate divergence between local and hard currency bond performance.\n- Weak domestic fundamentals can transmit to higher local currency yields and reduced portfolio flows into local debt, constraining domestic funding conditions.\n\nSource: \"Drivers of Emerging Market Bond Flows and Prices\", Global Financial Stability Notes, December 16, 2021.\n\n---\n\n Content in this bundle\n\n- Drivers of Emerging Market Bond Flows and Prices\n  - Drivers of Emerging Market Bond Flows and Prices (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Drivers of Emerging Market Bond Flows and Prices (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/global-financial-stability-notes/issues/2021/12/16/drivers-of-emerging-market-bond-flows-and-prices-511057"
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    "Authors: Evan Papageorgiou, Rohit Goel",
    "Published: December 16, 2021",
    "Series: Global Financial Stability Notes",
    "DOI: https://doi.org/10.5089/9781616357597.065",
    "A disconnect has developed between local currency- and hard currency-denominated bonds in emerging markets since the start of the recovery from the COVID-19 pandemic.",
    "Emerging market assets recovered sharply from the COVID-19 sell-off in 2020, but the post-pandemic recovery in 2021 has been highly uneven.",
    "Yields of local currency-denominated bonds have risen faster and are approaching their pandemic highs.",
    "Hard currency bond yields are still near their post-pandemic lows.",
    "Portfolio flows to local currency debt have lagged flows to hard currency bonds.",
    "The disconnect is closely linked to the external environment and fiscal and inflationary pressures.",
    "Local currency assets are significantly more sensitive to domestic fundamentals.",
    "Hard currency assets are dependent on external risk sentiment to a greater extent.",
    "Post-pandemic, stressed domestic fundamentals have weighed on local currency bonds, partially offsetting the boost from supportive global risk sentiment.",
    "The analysis highlights risks from an asynchronous recovery and weak domestic fundamentals for emerging markets.",
    "The note draws from the methodology developed in earlier Global Financial Stability Reports on:",
    "Results are consistent across models, supporting the differentiation in drivers for local versus hard currency assets.",
    "Evolution of the disconnect between local and hard currency markets remains a key consideration because local markets are the main source of funding for emerging markets.",
    "Policymakers should monitor domestic fundamentals (including fiscal and inflationary pressures) given their larger influence on local currency assets.",
    "Investors should account for greater sensitivity of hard currency assets to external risk sentiment when allocating across emerging market bond types.",
    "An asynchronous global recovery can exacerbate divergence between local and hard currency bond performance.",
    "Weak domestic fundamentals can transmit to higher local currency yields and reduced portfolio flows into local debt, constraining domestic funding conditions.",
    "**Drivers of Emerging Market Bond Flows and Prices**"
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