최신자료
Original sin redux: role of duration risk
Focus
Emerging market economies (EMEs) have been able to tap global capital markets by issuing government bonds in domestic currency. The ＂low-for-long＂ period of monetary policy globally has encouraged the issuance of longer-maturity bonds. The paper shows the mutually reinforcing nature of currency risk and duration risk. The disruptive impact of tightening global financial conditions is much larger when the EME government bonds have long maturities.
Contribution
The study makes use of a detailed and comprehensive data set of US investors‘ holdings of EME sovereign bonds. It examines the sensitivity of each investor sector‘s holdings to shifting financial conditions as proxied by the fluctuations in the broad dollar index. The ＂low-for-long＂ period of accommodative monetary policy has been accompanied by the lengthening of the maturity of bond issuance and outstanding stocks. While longer-maturity borrowing provides resilience against rollover risk, it increases duration risk for the investor, leading to portfolio outflows and associated tightening of financial conditions in the borrowing country.
Emerging market economies (EMEs) have been able to tap global capital markets by issuing government bonds in domestic currency. The ＂low-for-long＂ period of monetary policy globally has encouraged the issuance of longer-maturity bonds. The paper shows the mutually reinforcing nature of currency risk and duration risk. The disruptive impact of tightening global financial conditions is much larger when the EME government bonds have long maturities.
Contribution
The study makes use of a detailed and comprehensive data set of US investors‘ holdings of EME sovereign bonds. It examines the sensitivity of each investor sector‘s holdings to shifting financial conditions as proxied by the fluctuations in the broad dollar index. The ＂low-for-long＂ period of accommodative monetary policy has been accompanied by the lengthening of the maturity of bond issuance and outstanding stocks. While longer-maturity borrowing provides resilience against rollover risk, it increases duration risk for the investor, leading to portfolio outflows and associated tightening of financial conditions in the borrowing country.
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