U.S. investment in global bonds: As the fed pushes, some EMEs pull

Abstract

We analyze re-allocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors' allocations toward emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in EME allocations is associated with global “push” factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest re-allocations going to those EMEs with strong macroeconomic fundamentals such as less volatile inflation and more positive current account balances.