Working Paper: NBER ID: w23628
Authors: 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.
Keywords: monetary policy; emerging markets; bond markets; sovereign bonds; corporate bonds
JEL Codes: F21; F3; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US long-term interest rates are low (E43) | EMEs tend to issue more sovereign and private sector local currency bonds (F34) |
| US long-term interest rates are low (E43) | EMEs tend to issue more private sector foreign currency bonds (F34) |
| US long-term interest rates are low (E43) | US investment in EME sovereign bonds increases (G15) |
| Stronger regulatory quality and creditor rights (G38) | local currency government bond markets in countries are larger and attract more US investment (G15) |
| US long-term interest rates control (E43) | measures isolating effects of US unconventional monetary policy are statistically insignificant (E39) |
| Currency denomination (F31) | home bias phenomenon influences US investment in local currency bonds (G15) |
| Currency denomination (F31) | home bias phenomenon influences US investment in USD-denominated bonds (G15) |