overcoming original sinovercoming original sin sovereign debt research and management conference, 17...
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Overcoming Original SinSovereign Debt Research and Management Conference, 17 September 2020
Hyun Song Shin*, Economic Adviser and Head of Research, BIS
*The views expressed here are mine and not necessarily those of the Bank for International Settlements
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Pledged fiscal packages
Sources: IMF, Fiscal Monitor; IMF, World Economic Outlook; national data; BIS calculations.
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Fiscal deficits and public debt
Sources: IMF, World Economic Outlook, June 2020; BIS calculations.
Focus on emerging market economies
4Sources: Bloomberg; Institute of International Finance; JPMorgan Chase; national data; BIS calculations.
Exchange rate / US dollar Cumulated non-resident portfolio flows to EMEs
Sovereign bond spreads for EMEs
A decrease indicates an appreciation of the US dollar.
EME central bank actions and bond markets
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Bond fund flows and bond spreads Policy rate and bond purchase announcements
Source: Arslan, Drehmann and Hofmann (2020), BIS Bulletin 20
Announcements reduce yields with little effect on exchange rates
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Average response 10-year government yields response Exchange rate response
–1.5
–1.0
–0.5
0.0
0.5
–60
–40
–20
0
20
–3 –2 –1 0 1 2 3 4 5
% Bps
FX rate (lhs) 10y gvt yield (rhs)
–150
–100
–50
0
50
–30
–20
–10
0
10
–3 –2 –1 0 1 2 3 4 5
Bps Bps
South Africa (lhs) IndiaDays
–6
–4
–2
0
2
–3 –2 –1 0 1 2 3 4 5
%
Korea
Responses calculated as the cumulative difference (10-year yields) or growth (FX) relative to the day prior to the announcement. Day zero is the day of the announcement. An increase in the exchange rate denotes an appreciation of the US dollar.
Source: Arslan, Drehmann and Hofmann (2020), BIS Bulletin 20
High-frequency responses to bond purchase announcements
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South Africa India Korea
Announced on 25 March 2020 Announced on 20 March 2020 Announced on 9 April 2020Exchange rates versus the US dollar are standardised to one, and 10-year government bond yields are standardised to zero at the time of the announcement. Crosses denote active quotes. An increase in the exchange rate denotes an appreciation of the US dollar.
Source: Arslan, Drehmann and Hofmann (2020), BIS Bulletin 20
“Original Sin Redux”Carstens and Shin, Foreign Affairs, 2019
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Two duration measures
Duration = −𝑑𝑃/𝑃𝑑𝑟 Compare duration measures with:
Percentage return in local currency terms Percentage return in dollar terms
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Percentagereturn
Yield change0
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EMEs local currency sovereign bond returns1, January 2013 – October 2018
1Total return on bonds denominated in local currency as weekly change in JPMorgan GBI-EM principal return index in local currency and US dollar. Sources: JPMorgan Chase; BIS calculations.
Mexico South Africa
y = -0.06 -12.4xwhere R2 = 0.58
y = -0.01 -5.05xwhere R2 = 0.88
–10
–5
0
5
–0.5 0.0 0.5 1.0
Local currency returnChange in yield, in percentage points
Retu
rn, in
per
cent
y = -0.02 -12.8xwhere R2 = 0.70
y = 0.03 -4.59xwhere R2 = 0.94
–10
–5
0
5
–0.5 0.0 0.5 1.0
US dollar returnChange in yield, in percentage points
Retu
rn, in
per
cent
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EMEs local currency sovereign bond returns1, January 2013 – October 2018
1Total return on bonds denominated in local currency as weekly change in JPMorgan GBI-EM principal return index in local currency and US dollar. Sources: JPMorgan Chase; BIS calculations.
Indonesia Brazil
y = -0.09 -6.6xwhere R2 = 0.60
y = -0.01 -4.52xwhere R2 = 0.88
–10
–5
0
5
–0.5 0.0 0.5 1.0
US dollar returnChange in yield, in percentage points
Retu
rn, in
per
cent
y = -0.11 -8.52xwhere R2 = 0.66
y = 0.04 -4.34xwhere R2 = 0.93
–10
–5
0
5
–0.5 0.0 0.5 1.0
US dollar returnChange in yield, in percentage points
Retu
rn, in
per
cent
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Advanced economies sovereign bond returns1, January 2013 – October 2018
1 GBI Global Country 5 to 7 year maturity indices for the selected economies.
Sources: JPMorgan Chase; BIS calculations.
France Sweden
y = -0.06 -2.67xwhere R2 = 0.02
y = -0.03 -5.41xwhere R2 = 0.96
–4
–2
0
2
–0.2 –0.1 0.0 0.1 0.2 0.3
Local currency returnChange in yield, in percentage points
Retu
rn, in
per
cent
y = -0.12 -1.91xwhere R2 = 0.01
y = -0.03 -5.09xwhere R2 = 0.94
–6
–4
–2
0
2
–0.2 –0.1 0.0 0.1 0.2 0.3
US dollar returnChange in yield, in percentage points
Retu
rn, in
per
cent
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Covid-19 shock
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Foreign ownership in EME local currency bond markets
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US dollar and local currency returns vis-à-vis yield changes
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US dollar and local currency returns vis-à-vis yield changes (cont)
Monetary policy frameworks in EMEs: BIS Annual Economic Report 2019, Chapter II
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