With a combined population of more than 350 million people, frontier and developing Asia, which includes countries such as Vietnam, Cambodia, and Bangladesh, is located in the world’s fastest-growing region and has favorable demographics. The countries share a number of common macroeconomic, financial, and structural challenges. This book addresses issues related to economic growth and structural transformation, as well as the risk of a poverty trap and rising income inequality.
.P. Morgan GovernmentBondIndex-EmergingMarkets)
3. Hard Currency Government Bond Index Spread (EMBIGSP) = (Quarter-over-quarter change in domestic Hard Currency Total Return Bond index) – (Quarter-over-quarter change in the total return overall on the J.P. Morgan Emerging Market Bond Index)
Sources: Bloomberg and J.P. Morgan.
MSBFs Flows . Changes in MSBF emerging market allocations (dlog(msbf)) per fund per country are defined as the market value of the portfolio allocations at the end of each quarter, adjusted for price changes. To
Eurobond of benchmark size, it would likely be represented in the NEXGEM and investors would view it as a frontier asset.
The GovernmentBondIndex–EmergingMarkets is an index of emerging market local-currency-denominated sovereign bonds, but so far there is no index for local currency frontier bond markets, reflecting the infancy of these markets. Indonesia, Malaysia, the Philippines, and Thailand are represented in the GovernmentBondIndex–EmergingMarkets.
Citibank and Bank of America Merrill Lynch also have local currency sovereign bond indices, but none of
Portfolio flows to emerging markets (EMs) tend to be correlated. A possible explanation is the role global benchmarks play in allocating capital internationally, the so-called “benchmark effect.” This paper finds that benchmark-driven investors indeed play a large role in a key segment of the market—the EM local currency government bond market—, accounting for more than one third of total foreign holdings as of end-2014. We find that the prominence of these investors declined somewhat after the May 2013 taper tantrum, but remain high. This distinction is important in understanding the drivers of EM capital flows and their sensitivity to different types of shocks. In particular, a high share of benchmark-driven investors may result in capital flows that are more sensitive to global shocks and less sensitive to country factors.
flows to EMs ( Cerutti et al. 2015 , IMF 2014, Miyajima and Shim 2014 , Raddatz et al. 2015 ).
In this paper, we distinguish between two types of foreign investments in EM local currency bond markets: benchmark-driven and unconstrained. We define benchmark-driven investors as those that invest in countries through a fund that either tracks or closely follows a flagship benchmark index. In the case of EM local currency bond markets, that benchmark is usually the J.P. Morgan GovernmentBondIndex-EmergingMarkets (GBI-EM), which has a predefined list of countries
Morgan’s Emerging Market Bond Index Global [EMBIG]), as well as the local currency yields (based on JP Morgan’s GovernmentBondIndex-EmergingMarkets [GBI-EM]).
2. Capital Flow Forecast Models : To assess the drivers of emerging market bond capital flows, the capital flows at-risk framework is deployed: based on domestic fundamentals and external financial conditions.
In using these models local and hard currency bonds can be compared and their drivers can be examined in a consistent manner. They also serve to: (1) assess the mispricing of emerging market bonds
Unconstrained multi-sector bond funds (MSBFs) can be a source of spillovers to emerging markets and potentially exert a sizable impact on cross-border flows. MSBFs have grown their investment in emerging markets in recent years and are highly concentrated—both in their positions and their decision-making. They typically also exhibit opportunistic behavior much more so than other investment funds. Theoretically, their size, multisector mandate, and unconstrained nature allows MSBFs to be a source of financial stability in periods of wide-spread market turmoil while others sell at fire-sale prices. However, this note, building on the analysis of Cortes and Sanfilippo (2020) and incorporating data around the COVID-19 crisis, finds that MSBFs could have contributed to increase market stress in selected emerging markets. When faced with large investor redemptions during the crisis, our sample of MSBFs chose to rebalance their portfolios in a concentrated manner, raising a large proportion of cash in a few specific local currency bond markets. This may have contributed to exacerbating the relative underperformance of these local currency bond markets to broader emerging market indices.
Mr. Itai Agur, Melissa Chan, Mr. Mangal Goswami, and Mr. Sunil Sharma
, “ Are Countries Losing Control of Domestic Financial Conditions? ” Ch. 3 in Global Financial Stability Report , ( April ).
International Monetary Fund , 2017b , “ Is Growth at Risk? ” Ch. 1 in Global Financial Stability Report , ( October ).
J.P. Morgan , 2014 , “ GovernmentBondIndex—EmergingMarkets Family of Indices ,” Global Index Research , ( June ).
J.P. Morgan , 2015 , “ EMBI Global and EMBI Global Diversified—Rules and Methodology ,” Global Index Research , ( December ).
Jaramillo , Laura , and Anke Weber , 2013a