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Emerging market economy exchange rates and local currency bond markets amid the Covid-19 pandemic

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  • Boris Hofmann
  • Ilhyock Shim
  • Hyun Song Shin

Abstract

Borrowing through domestic currency bonds has not insulated emerging market economies (EMEs) from the financial shock unleashed by Covid-19; EME local currency bond spreads spiked amid sharp currency depreciations and capital outflows. Portfolio investors face amplified losses as local currency spreads and exchange rates move in lockstep; their revised portfolio allocations in turn strengthen this correlation. EMEs with monetary policy frameworks that are equipped to address the feedback loop between exchange rate depreciation and capital outflows stand a better chance of weathering the financial fallout from the Covid-19 pandemic. To counter large stock adjustments in domestic bond markets, EME central banks may need to expand their toolkit to take on a "dealer of last resort" role; a number of them are already moving in this direction.

Suggested Citation

  • Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2020. "Emerging market economy exchange rates and local currency bond markets amid the Covid-19 pandemic," BIS Bulletins 5, Bank for International Settlements.
    • Handle: RePEc:bis:bisblt:5
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    References listed on IDEAS

    as
    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Stefan Avdjiev & Egemen Eren & Patrick McGuire, 2020. "Dollar funding costs during the Covid-19 crisis through the lens of the FX swap market," BIS Bulletins 1, Bank for International Settlements.
    3. Egemen Eren & Andreas Schrimpf & Vladyslav Sushko, 2020. "US dollar funding markets during the Covid-19 crisis - the international dimension," BIS Bulletins 15, Bank for International Settlements.
    4. Emanuel Kohlscheen & Benoit Mojon & Daniel Rees, 2020. "The macroeconomic spillover effects of the pandemic on the global economy," BIS Bulletins 4, Bank for International Settlements.
    5. Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2020. "Bond Risk Premia and The Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 497-520, December.
    6. Mr. Serkan Arslanalp & Mr. Takahiro Tsuda, 2014. "Tracking Global Demand for Emerging Market Sovereign Debt," IMF Working Papers 2014/039, International Monetary Fund.
    7. Raphael Auer & Giulio Cornelli & Jon Frost, 2020. "Covid-19, cash, and the future of payments," BIS Bulletins 3, Bank for International Settlements.
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