On international integration of emerging sovereign bond markets

Abstract

The paper investigates the international integration of EM sovereign dollar-denominated and local-currency bond markets. Factor analysis is used to examine movements in sovereign bond yields and common sources of yield variation. The results suggest that EM dollar-denominated sovereign debt markets are highly integrated; a single common factor that is highly correlated with US and EU interest rates explains about 80 percent of the total variability in yields. EM sovereign local currency bond markets are not as internationally integrated, and three common factors explain about 74 percent of the total variability. But a factor highly correlated with US and EU interest rates still explains 63 percent of the yield variation accounted for by common factors. That said, there is some diversity among EM countries in the importance of common factors in affecting sovereign debt yields.

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“…This result is consistent with the findings of Martell (2008) and Longstaff et al (2011). Furthermore, this result might reflect an increasing level of government bond market integration, since emerging bond markets are becoming increasingly integrated with global financial markets over time and therefore becoming more exposed to influence of global factors (see, Agur et al, 2018). For instance, Šimović et al (2016) find that government bond markets of the more advanced post-transition countries in the Eastern European region have achieved higher levels of integration with the Eurozone bond market.…”

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