Working Paper: NBER ID: w20571
Authors: John D. Burger; Rajeswari Sengupta; Francis E. Warnock; Veronica Cacdac Warnock
Abstract: We analyze reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors' allocations toward emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in EME allocations is associated with global "push" factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as more positive current account balances, less volatile inflation, and stronger economic growth. We also provide a descriptive analysis of global bond markets' structure and returns.
Keywords: emerging markets; local currency bonds; US investors; portfolio reallocations; global financial crisis
JEL Codes: F21; F31; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary conditions (like low US interest rates) (E49) | increased allocations towards emerging market local currency bonds (G15) |
| Stabilization of inflation in South Africa (E63) | reallocations into rand-denominated bonds (G15) |
| Global factors (like US monetary policy) (F69) | allocations towards emerging market bonds (G15) |
| Local factors (like inflation volatility and current account balances) (F32) | specific allocations (H77) |