Edited by Patrick Artus, André Cartapanis and Florence Legros
Chapter 4: Emerging Sovereign Bond Markets: A View from the Extremes
Pierre Laurent and Jérôme Teïletche* INTRODUCTION Over the last decade, emerging sovereign bond markets have become an important source of diversiﬁcation of portfolios for global investors. According to IIF data, between 1995 and 2001 these markets received more than US$43 billion per year. If we consider only the period between 1995 and 1997 (preceding the Asian and Russian crises), more than US$65 billion per year was received. For comparison, we should note these markets received less than US$18 billion per year of buying ﬂows for equities (US$28 billion per year between 1995 and 1997). From an economic point of view, the sovereign bond markets (including Brady bonds and Euromarkets bonds) have become a major ﬁnancing channel for these countries. In broad terms, emerging bond markets are classiﬁed as risky. This point is illustrated in Figure 4.1 where we represent the risk/return proﬁles obtained for several ﬁnancial assets. Emerging bonds appear as the most proﬁtable assets (the average return is the highest) but at the same time the riskiest ones. The risk involved in emerging bond markets is a crucial question, obviously for the investors in these zones but also for policy-makers. Indeed since the mid 1990s, crises in emerging markets have spread to the ﬁnancial markets of industrial countries and, on occasion, they have hit the banking systems and aﬀected cyclical developments in industrial countries. This has led policy-makers to intervene in markets (and notably central bankers) and...
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