Risk Characteristics of Emerging Market Bonds

In 2009, emerging market bonds were among the top-performing assets in comparison to both the global equity and fixed income asset classes. The recent, rapid rise in US Treasury yields and the concern over tightening monetary policies in certain countries led us to evaluate the relationship between global interest rate risks and emerging market bonds. In this publication, we attempt to address this relationship with an emphasis on the risk characteristics of the market, along with the historical relationship of emerging market bonds with US Treasuries, other developed market sovereign bonds, and equity market volatility. We consider possible warning signals of impending volatility in emerging market bonds during the period we observed, as well as possible ways to have improved the diversification benefits with equities during this period.