Flights to safe assets in bond markets: Evidence from emerging market economies

Abstract

This paper investigates cross-border flights to safety (FTS) in sovereign bond markets from the perspective of emerging market economies (EMEs). Accurate identification of such events provides a detailed picture of sharp changes in prices of international assets and potential sources of EMEs' financial fragility. We construct new measures of the FTS occurrence and magnitude by focusing on extreme movements in long-term bond markets vis-à-vis the US for a diverse group of 21 EMEs. An adaptable time-series anomaly detection algorithm is used to recognize patterns in daily data on bond returns from 2002 to 2021. The paper shows that the FTS episodes in the entire sample of EMEs turn out to be short-lived and map well into periods of international financial and economic downturns. The results from panel-data models indicate that country-specific factors, in particular economic fundamentals, matter more for the FTS magnitude than for their mere occurrence. This supports the notion that flights from bond markets are usually triggered by shocks originating outside of EMEs, but the magnitude of these events may materially depend on their domestic conditions, including macroeconomic stability and policy factors. Moreover, the country-specific factors are more important when FTS episodes are driven by external financial risk and US monetary policy rather than shifts in global economic activity.