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EME bond portfolio flows and long-term interest rates during the Covid-19 pandemic

Summary:
BIS Bulletin  |  No 18  |  20 May 2020 by  Peter Hördahl and Ilhyock Shim PDF full text (808kb)  |  9 pages Key takeaways Bond portfolio outflows from emerging market economies (EMEs) are typically associated with currency depreciation and rising domestic long-term interest rates. This relationship asserted itself in a particularly stark way during the Covid-19 crisis in mid-March 2020. The relationship between bond portfolio outflows and long-term rates varies across EMEs, depending on factors such as bond market depth, FX market functioning and

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BIS Bulletin  |  No 18  | 
20 May 2020
PDF full text
 (808kb)
 |  9 pages

Key takeaways

  • Bond portfolio outflows from emerging market economies (EMEs) are typically associated with currency depreciation and rising domestic long-term interest rates. This relationship asserted itself in a particularly stark way during the Covid-19 crisis in mid-March 2020.
  • The relationship between bond portfolio outflows and long-term rates varies across EMEs, depending on factors such as bond market depth, FX market functioning and sovereign risk. The impact of these factors on the relationship has been thrown into sharper relief during the Covid-19 pandemic.
  • Recent policy responses, such as bond purchase programmes, duration swaps and efforts to stabilise exchange rates, can play an important role in maintaining financial stability in EMEs when they face bond outflows. Policy measures to develop deep and liquid bond markets and strengthen the resilience of local currency bond and FX markets are likely to enhance market functioning in the longer term.
International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

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