Latin American local bond markets prove resilient

Subject

Foreign investment in local government bond markets.

Significance

In stark contrast to the sharp declines in emerging market (EM) equity markets, down by 9.3% in dollar terms this year, the domestic government bond markets of developing economies remain relatively resilient, despite the dramatic falls in EM currencies. Latin America's main local debt markets have attracted the largest inflows of foreign investment among the main EM regions, with non-resident investors even increasing their holdings of Brazilian and Colombian domestic bonds this year in the face of declines of 46% and 23% in their respective currencies.

Impacts

• China's latest interest rate cut on October 23 will put more pressure on many commodity-dependent EM economies.
• EM local government bond markets are underpinned by domestic institutional investors, such as pension funds and insurance companies.
• EM dollar-denominated government debt will prove more resilient than local currency bonds.
• However, companies with large external debts are vulnerable because of sharp falls in local currencies.