Sensitivity of Emerging Market Bond Fund Flows to US Monetary Stance and Global Risk Aversion

Abstract

This note ranks the sensitivities of emerging market economies’ (EMEs’) bond fund flows to changes in the US monetary stance and global risk aversion. Based on the sensitivities, we draw heat maps to indicate the economies that are more likely to suffer large outflows. We find that bond fund flows have become more sensitive to changes in the US monetary stance and global risk aversion since the global financial crisis, possibly attributable to an increasing participation of global investors in the EME bond markets through mutual funds. Some emerging Asian economies, such as Hong Kong, Korea and Singapore, are found to be more resilient in times of market stress and demonstrate lower outflow persistence, which may reflect that global investors are able to differentiate among emerging economies based on their fundamentals. Our results also show that persistence is relatively high for bond fund inflows to emerging Asian economies, suggesting that policymakers should be vigilant about the risk of large inflows.

Keywords: Fund Flow, Emerging Markets, Bond Market, Risk Aversion

JEL Classification: F21, G15, G28