EME bond portfolio flows and long-term interest rates during the Covid-19 pandemic

Key takeaways

• Bond portfolio outflows from emerging market economies (EMEs) are typically associated with currency depreciation and rising domestic long-term interest rates. This relationship asserted itself in a particularly stark way during the Covid-19 crisis in mid-March 2020.
• The relationship between bond portfolio outflows and long-term rates varies across EMEs, depending on factors such as bond market depth, FX market functioning and sovereign risk. The impact of these factors on the relationship has been thrown into sharper relief during the Covid-19 pandemic.
• Recent policy responses, such as bond purchase programmes, duration swaps and efforts to stabilise exchange rates, can play an important role in maintaining financial stability in EMEs when they face bond outflows. Policy measures to develop deep and liquid bond markets and strengthen the resilience of local currency bond and FX markets are likely to enhance market functioning in the longer term.