What happens to emerging market economies when US yields go up?

Abstract

This paper explores under what circumstances increases in US Treasury yields spill over into declines in emerging market economy (EME) asset prices. We identify episodes of sharp increases in US 10-year Treasury yields and explore under which conditions these are associated with reductions in EME local currency yields, exchange rates and equity prices. We find that rising US yields are more likely to be associated with adverse outcomes in emerging markets when they reflect (i) a rise in the US term premium and (ii) dollar appreciation. The effects of these variables are highly non-linear economically significant and robust to a variety of sensitivity checks. Of EME fundamentals, rising EME inflation expectations, a current account deficit and greater exchange rate flexibility seem to be associated with worse EME outcomes, although these results do not hold in all specifications.