Global Financial Spillovers to Emerging Market Sovereign Bond Markets

Foreign holdings of emerging markets (EMs) government bonds have increasedsubstantially over the last decade. While foreign participation in local-currency sovereignbond markets provides an additional source of financing and reduces sovereign yields, itraises concerns about increased sensitivity of yields to shifts in market sentiment. Theanalysis in this paper suggests that foreign participation and an undiversified investor basetransmit global financial shocks to local-currency sovereign bond markets by increasingyield volatility and, beyond a certain threshold, amplify these spillovers. These estimates arerobust to a range of econometric techniques including panel smooth threshold regression.