Emerging market bond returns—An investor perspective

Abstract

The last twenty five years provided international investors in sovereign bonds of emerging market countries with a colourful experience consisting of several defaults that resulted in protracted, frustrating and -most importantly -costly salvage operations. It therefore appears natural to ask how investors have priced sovereign bonds under these challenging conditions. The novel feature of this study consists in applying a conventional multifactor global market model to emerging market sovereign bond index rates of return that are denominated in US dollars and subsequently relating the unexplained residual from the market model's estimates of each country's total bond index return to country specific factors. They include political and financial risks as well as other presumed determinants of bond index rates of return. The estimation approach allows us to separate out the common influences of global bond market movements from the country-specific influences that drive rates of return on the outstanding bonds of 19 emerging market countries from Latin America, Transition Economies, Asian and African countries. The results of our study confirm that sovereign countries' bond index rates of return that include interest payments and capital gains/losses may be explained in terms of conventional bond pricing models by combining global market factors with local risk and other country-specific influences. Unsurprisingly, emerging market bonds appear to be dancing to different tunes than those in developed economies.

The role of country, regional and global market risks in the dynamics of Latin American yield spreads

“…This is in line with Jüttner et al (2006) who show that the response of emerging market bond returns to changes in the external factors may differ significantly between oil-exporting and oil-importing countries. McGuire and Schrijvers (2003) also establish a considerable cross-country heterogeneity in daily yield spread movements.…”

“…10,11 These data might add information to a country's risk rating because the exchange rate is closely monitored by international investors. 12 A fall in the exchange rate signals a worsening position of the country's financial system (Jüttner et al, 2006) and can also increase the probability of default by triggering capital flight (Ferrucci, 2003).…”

“…9 See www.prsgroup.com/ICRG Methodology.aspx for details. Hartelius et al (2008) and Jüttner et al (2006) also employ country ratings of the PRS Group in the studies of emerging market debt. 10 The effect of the volatility of the local currency exchange rate was also considered but found insignificant.…”

The global and regional factors in the volatility of emerging sovereign bond markets

“…(2007) relate changes in emerging market sovereign spreads to macroeconomic announcements and …nd that sovereign spreads react to rating actions and changes in the US interest rate rather than to country-speci…c factors. Jüttner and al. (2006) attempt to explain the unexplained residual returns in nineteen emerging sovereign bond markets by country-speci…c factors such as GDP growth rate, in ‡ation rate and political and …nancial risks.…”

“…The incomplete list of references includes, among others, Andritzky and al. (2007), Jüttner and al. (2006), Batten and al.…”