On International Integration of Emerging Sovereign Bond Markets

Abstract

The paper investigates the international integration of EM sovereign dollar-denominatedand local-currency bond markets. Factor analysis is used to examine movements insovereign bond yields and common sources of yield variation. The results suggest that EMdollar-denominated sovereign debt markets are highly integrated; a single common factorthat is highly correlated with US and EU interest rates explains, on average, about 80percent of the total variability in yields. EM sovereign local currency bond markets are notas internationally integrated, and three common factors explain about 74 percent of thetotal variability. But a factor highly correlated with US and EU interest rates still explains63 percent of the yield variation accounted for by common factors. That said, there issome diversity among EM countries in the importance of common factors in affectingsovereign debt yields.