Analyzing the Determinants of EMDE Local-Currency Sovereign Yields : A Simple Comparative Approach

Local currency bond markets provide a stable source of funding for emerging market sovereigns. A better understanding of the determinants of yields in this market can help improve sovereign debt management practices and lower the cost of borrowing. This paper describes a simple and adaptable framework for analyzing a wide variety of possible drivers of a country’s local currency sovereign yields relative to comparable countries. The analytical framework consists of both data-driven quantitative analysis and qualitative country case studies, which complement one another. The authors use a specific country example to illustrate our approach. The authors find that macroeconomic fundamentals and external factors are important determinants of the relative cost of borrowing across countries, but they are not the whole story. Policy reforms aimed at improving local-currency government bond market development and market functioning can also be crucial in managing sovereign yields. The analytical framework has enough flexibility to consider specific country circumstances and can help identify meaningful policy implications and recommendations for sovereign debt managers