Determinants of Asia-Pacific Government Bond Yields

Abstract

This paper examines the dynamic properties of Asia-Pacific local currency sovereign bond yields and risk premiums. We focus, in particular, on the properties and interactions of components of bond risk premiums that are due to credit spreads and exchange rates. We find that local variables are significant in explaining the dynamics of these components. In particular, the credit risk premium component is, unsurprisingly, mostly affected by a factor that reflects local sovereign credit risk, while the currency risk premium component is affected by the credit factor as well as by the difference in the interest rate level between the local and US yield curves. Moreover, we find that, quantitatively, local variables play a large role in explaining the variation in the credit and currency risk premium components.

Full Publication: Asia-Pacific Fixed Income Markets: Evolving Structure, Participation and Pricing

Keywords: emerging market bonds, bond risk premia, currency risk, credit risk

JEL Classification: F30, G12, G15