Comments on "Local currency bond returns in emerging market economies and the role of foreign investors"

Emerging market economy (EME) bonds include sovereign bonds, quasi-sovereign bonds and corporate bonds. They can also be divided into local currency and US dollar-denominated bonds. This paper specifically focuses on local currencydenominated sovereign bonds. The issuance of such bonds has experienced a phenomenal growth, having reached USD 10 trillion by 2017. These bonds have relatively low default risk and better liquidity; however, they might still be subject to exchange rate risk. The authors (So, Valente and Wu) study the cross-sectional risk-return relation of these bonds. Interest rate risk can be immunised by matching duration. The concerns relating to default risk and liquidity are already low for these bonds. In addition to the exchange rate risk, this paper also looks at new systemic risk originating from foreign (institutional) investors’ portfolio return. Foreign investors hold, on average, 20% of EME local currency sovereign bonds. Institutional investors account for the majority of foreign investors, who usually look for higher yields or portfolio diversification.