Emerging Local Currency Bond Markets

Abstract

We assess the development of local currency bond markets in emerging market economies (EMEs). Supported by policies and laws that helped to improve macroeconomic stability and creditor rights, many local currency EME bond markets have grown substantially over the past decade and have also provided USD-based investors with attractive returns. U.S. investors have responded by increasing their holdings of EME local currency bonds from less than $2 billion in 2001 to over$27 billion by end-2008. While the increase in U.S. investment spanned many EMEs, empirical tests suggest that relatively more went to those with identifiable investor-friendly institutions and policies.